Barry Eichengreen No REsolutioN without GRowth · Barry Eichengreen USUp until the crisis, Europe...

CREDIT SUISSE SALON —12

Barry EichengreenProfessor of Economics and Political Science, University of California, Berkeley

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No REsolutioN without GRowthThe European Union has been in dire straits before, for example, the “open chair” crisis of the 1960s and the crisis of the European monetary system in 1992. None compares with the challenges Europe now faces. Solving the problem will require the right forms of fiscal integration and, inevitably, economic stimulus.

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Giselle weiss last year, Jean-Claude trichet said that a quantum leap in European integration would be needed to make the euro work and hold the European integration process together. Barry Eichengreen It has been understood from the start that monetary integration ultimately will require fiscal integration. And fiscal integration in turn will require political integration. The idea was that Europe would move ahead with monetary integration now and that fiscal and political integration would follow sometime down the road. The problem is that Europe got sideswiped first by a global crisis and then by China, requiring it to complete the process of fiscal and political in-tegration in double time.

Elaborate a bit on the issue with China.Barry Eichengreen Countries like Portugal and Greece specializing in medium-tech manufacturing – for example, textiles – suddenly found themselves in head-to-head competition with China. They might have moved upmarket into more sophisticated goods, but this is easier said than done.

what is the solution?Barry Eichengreen Countries need to invest in education, expand apprentice ship training schemes, encourage university-business collaboration, and make labor and product markets more flexible. Unfortunately, the euro created an unlimited supply of cheap money for these economies in the period ending in 2009, which allowed them to put off the day of reckoning. There is now the recognition that product and labor market liberalization are of the essence.

6JG�)TQWR�QH��ƟPCPEG�OKPKUVGTU�ECOG�QWV�QH�VJG�recent summit in Mexico City all sounding pretty chipper. is there a reason for optimism?

Barry Eichengreen US economic data in early 2012 have been better. Europe, for its part, managed to draw back from the brink in late 2011, when there were wor-ries of a full-blown banking crisis. The European Central Bank (ECB) stepping in to guarantee liquidity to the banks allowed investors and savers to breathe a sigh of relief. But there are clouds on the horizon.

such as …?Barry Eichengreen For one, China is now slowing down. And there are serious headwinds to economic growth in the US, including the winding down of the fiscal stimulus, continued weak housing prices, and persistent elevated unemployment. Finally, while Europe has averted the worst, it did it by buying time. And buying time is a worthwhile investment only if you do something with it.

Many debates over the euro crisis are very black and white: Either the Eu will dissolve or it will become the united states of Europe. is there no middle ground?



“The only true global currency, … the only real source of safe assets globally right now is the US. And the US is simply not going to be large enough to provide all the liquidity that the global economy needs going forward.”



Barry Eichengreen Limited forms of fiscal integration and cooperation would go a long way toward solving the problem. For example, Europe doesn’t need a gigan-tic EU budget. It doesn’t need to go all the way to US-style fiscal federalism, with large transfers of tax revenues among the member states.

what does it need?Barry Eichengreen A pool of money sufficient for funding deposit insurance for all European banks and for winding up or recapitalizing problem banks. Big Euro-pean banks operate in multiple countries. Irish banks, for instance, were too big for the Irish government alone to save when they got into trouble, and Ireland is now paying the price. The EU could do with European-level funding for unemploy-ment insurance as well. Finally, the EU needs a jointly funded and adequately capitalized emergency lending facility. Currently that facility has a name, the European Stability Mechanism, but the adequate funding is lacking.

Paul Krugman has been arguing against austerity for over two years. is austerity part of the problem?

Barry Eichengreen There will be no resolution to Europe’s crisis without growth. And the term “expansionary fiscal austerity” has been shown to be a non sequitur. More generally, there is still no well-articulated European growth strategy in place. At Davos, at the end of January, Olli Rehn, vicepresident of the European Commission, was asked where growth would come from. He answered: “Animal spirits.” The idea was that confidence would magically return and growth would resume. Better would be for policymakers to actively take concrete steps to stimulate growth. And for me, there are only two concrete steps that would make a difference.

what are they?Barry Eichengreen First, more government spending where there’s room, as in Germany. Second, more support for economic growth from the ECB, which can cut rates by more and do the equivalent of quantitative easing through its secu-rity markets purchase program. My best guess at this point is that the selective fiscal stimulus won’t happen and that the ECB will again find itself as the policy-maker of last resort.

“Buying time is a worthwhile investment only if you do something with it.”



A few months ago, China offered to help bail out Europe. is that a solution?

Barry Eichengreen China has repeatedly said that it does not want to be viewed as a source of “stupid money” (an expression that comes directly from a number of Chinese officials). China understands that it is a large country and that it has a responsibility to try to help stabilize Europe and the global economy. But it is also a poor country. China is likely to funnel money to Europe through the Interna-tional Monetary Fund only if it sees Europe as first taking steps to fix its own problems.

the Chinese have already made investments in Greek ports, for example.Barry Eichengreen Right, because they understand that Greece is a prime location from a commercial point of view and there are opportunities there. And the Chinese will do more. But are they going to be the solution to Europe’s crisis? No.

there was talk of the euro being a second – or one among several – reserve currencies. Does it matter if it reaches that status or not?

Barry Eichengreen The only true global currency, the only real source of interna-tional liquidity, the only real source of safe assets globally right now is the US. And the US is simply not going to be large enough to provide all the liquidity that the global economy needs going forward.

so where will that liquidity come from?Barry Eichengreen The only other economies with the scale needed to join the US as serious providers of international liquidity are the euro area and China. If Europe deals with its crisis, and China deals with its growth slowdown and its need to develop and liberalize its financial markets, then 21st-century globalization will have the liquidity that it needs to function.

Do you see areas of particular strength that Europe still has to exploit?Barry Eichengreen Up until the crisis, Europe had been growing as fast as the US. There is no particular reason to think that, all of a sudden, Europe is incapable of growing. To be sure, it has problems that the US doesn’t share to the same extent, like the demographic problem. But that can be solved through higher fertility rates or, more obviously, through more immigration-friendly policies. Ƌ�


Barry Eichengreen No REsolutioN without GRowth · Barry Eichengreen USUp until the crisis, Europe...

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