Posted by: Dirk | November 10, 2015

Robert J. Gordon at ECB’s Sintra conference: “euro was not a good idea”

The ECB held a conference at Sintra near Lisbon this summer and the book with the papers is available as pdf here. As you probably know, US economists have been critical of the euro for a long time – and rightly so. So, I am happy to see that Robert J. Gordon was allowed to voice his critique, responding to Jordi Gali (my highlighting):

3. Why was the euro area unemployment rate so high in 2014?

This question can be rephrased – why in May 2015 was the unemployment rate in Germany 4.7% while that in Greece was 25.6%, that in Spain 22.5%, and that in Italy 12.4%? The weighted average for the euro area was a rate of 11.1%. The ultimate answer to the apparent puzzle of high average euro area unemployment is that the euro was not a good idea, as many economists predicted before 1999, because of the lack of a centralised fiscal budget and insufficient labour mobility. The German economy is thriving and is able to impose its version of tight money on the peripheral countries, most of which suffer from severe forms of structural unemployment and perverse labour-market institutions.

Learning from mistakes is difficult but important. UK economists and Swedish economists were against the euro, too, by the way. Willem Buiter chipped this in at the conference (again, my highlighting):

To close the output gap, the euro area needs effective combined monetary and fiscal stimulus. Unfortunately, the deeply flawed original design of EMU has not been meaningfully revised since its inception, except as regards the creation of a (too) small sovereign liquidity and bank recapitalisation fund (the European Stability Mechanism (ESM)), some quite impressive, but still incomplete, steps towards banking union and a regrettable increase in the scope and scale of own-risk financial operations by NCBs. Without deep reforms, I believe the euro area will not survive – and does not deserve to.

It seems that things are moving in the right direction. There are many more critical economists who had and still have something to say about the euro, and they deserve to be heard.


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