Stage Three for the Euro Crisis?

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The first two components of the euro crisis – abanking crisis that resulted from excessive leveragein both the public and private sectors, followed by a sharp fall in confidencein eurozone governments – have been addressed successfully, or at least partly so. But that leaves the third,longest-term, and most dangerous factor underlying the crisis: the structural imbalance between the eurozone’s northand south.

First, the good news: The fear that Europe’sbanks could collapse, with panickedinvestors’ flight to safety producing aEuropean Great Depression, now seems to have passed. Likewise, the fear, fueledentirely by the European Union’s dysfunctional politics, that eurozonegovernments might default – thereby causing the same direconsequences – has begun to dissipate.

Whether Europe would avoid a deepdepression hinged on whether it dealtproperly with these two aspects of the crisis. But whether Europeas a whole avoids lost decades of economic growth still hangs in the balance,and depends on whether southern European governments can rapidly restorecompetitiveness.

The process by which southern Europe becameuncompetitive in the first place was driven by marketprice signals – by the incentives those signals created forentrepreneurs, and by how entrepreneurs’ individually rational responses playedout in macroeconomic terms. Northern Europeans with money to invest werewilling to lend on extraordinarily easy terms to those in the south who wantedto spend, and ample pre-2007 spending made employers there willing to raisewages rapidly.

As a result, southern Europe adopted an economic configuration in whichits wage, price, and productivity levels made sense only so long as it spent

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关键词：Crisis stage Three euro ISIS dangerous private between public factor

The first two components of the euro crisis – a banking crisis that resulted from excessive leverage in both the public and private sectors,followed by a sharp fall in confidence in eurozone governments – have beenaddressed successfully, or at least partly so.
But that leaves the third, longest-term, and mostdangerous factor underlying the crisis: the structuralimbalance between the eurozone’s north and south.(two crisis, banking crisis and government crisis and prolonged imbalance crisis)

The fear that Europe’sbanks could collapse now seems to have passed. Likewise, the fear that eurozonegovernments might default – thereby causing the same direconsequences – has begun to dissipate.Whether Europe would avoid a deepdepression hinged on whether it dealtproperly with these two aspects of the crisis. But whether Europeas a whole avoids lost decades of economic growth still hangs in the balance,and depends on whether southern European governments can rapidly restorecompetitiveness.

NorthernEuropeans with money to invest were willing to lend on extraordinarily easyterms to those in the south who wanted to spend, and ample pre-2007 spendingmade employers there willing to raise wages rapidly.Now, if, as appears to be the case, Europedoes not want its south to spend more than it earns and its north to spendless, wages, prices, and productivity must shift.southern European productivity levels need to riserelative to the north, and wage and price levels need to fall by roughly 30%,so that the south can pay its way with exports and northern Europecan spend its earnings on those products.(the reason of crisis and general solution)

If the euro is to be preserved, and if stagnation is to be avoided, five policy measurescould be attempted:

   Northern Europe couldtolerate higher inflation – an extra two percentage points for five years wouldtake care of one-third of the total north-south adjustment;Northern Europe could expand social democracy by making its welfare states more lavish;Southern Europe could shrink its taxes and social services substantially;Southern Europe could reconfigure its enterprises to become engines ofproductivity; Southern Europecould enforce deflation.

The fifth option is perhaps the least wise. The fourthoption would be wonderful; but, if anyone knew how to bring southern Europe's enterprises up to the productivity levels of thenorth, it would have happened already.So we are left with a combination of the first threeoptions, also known as “policies to restore European growth”(concrete solution)