Three New Lessons of the Euro Crisis

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While some observers argue that the key lesson of theeurozone’s baptism by fire is that greater fiscal and banking integration areneeded to sustain the currency union, many economists pointed this out evenbefore the euro’s introduction in 1999. The real lessons of the euro crisis lieelsewhere – and they are genuinely new and surprising.
The received wisdom about currency unions was that theiroptimality could be assessed on two grounds. First, were the regions to beunited similar or dissimilar in terms of their economies’ vulnerability toexternal shocks? The more similar the regions, the more optimal the resultingcurrency area, because policy responses could be applied uniformly across itsentire territory.
If economic structures were dissimilar, then the secondcriterion became critical: Were arrangements in place to adjust to asymmetricshocks? The two key arrangements that most economists emphasized were fiscaltransfers, which could cushion shocks in badly affected regions, and labormobility, which would allow workers from such regions to move to less affectedones.
The irony here is that the impetus toward currency unionwas partly a result of the recognition of asymmetries. Thus, in the aftermathof the sterling and lira devaluations of the early 1990’s, with their resultingadverse trade shocks to France and Germany, the lesson that was drawn was thata single currency was needed to prevent such disparate shocks from recurring.
But this overlooked a crucial feature of monetary unions:free capital mobility and elimination of currency risk – indispensableattributes of a currency area – could be (and were) the source of asymmetricshocks. Currency unions, in other words, must worry about endogenous as much as exogenous shocks.
Free capital mobility allowed surpluses from large saverssuch as Germany to flow to capital importers such as Spain, while the perceivedelimination of currency risk served to aggravate such flows. To investors,Spanish housing assets seemed a great investment, because the forces ofeconomic convergence unleashed by the euro would surely push up their prices –and because there was no pesetathat could lose value.
These capital flows created a boom – and a loss oflong-term competitiveness – in some regions, which was followed by anall-too-predictable bust. To the extent that monetary and fiscal arrangementsfail to reduce or eliminate moral hazard, the risk that capital flows createthese endogenous asymmetric shocks will remain commensurately high.
A second insight from the case of the eurozone, advanced bythe economist Paul de Grauwe, is that currency unions can be prone toself-reinforcing liquidity crises, because some vulnerable parts (Greece,Spain, Portugal, and Italy at various points) lack their own currencies. Untilthe European Central Bank stepped in last August to become the central bank notjust of Germany and France, but also of the distressed peripheral countries,the latter were like emerging-market economies that had borrowed in foreigncurrency and faced abrupt capital outflows. These “suddenstops,” as the economists Guillermo Calvo and Carmen Reinhart call them,raised risk premiums and weakened the affected countries’ fiscal positions,which in turn increased risk, and so on, creating the vicious downward spiralthat characterizes self-reinforcing crises.
The most appropriate analogy is with a country like SouthKorea. In the aftermath of the Lehman Brothers collapse in 2008, South Koreaneeded dollars, because its firms had borrowed in dollars that domestic saverscould not fully supply. Thus, it entered into a swap arrangement with theFederal Reserve to guarantee that South Korea’s demand for foreign currencywould be met.
Of course, the euro crisis was not just a liquidity crisis.Several countries in the periphery (Greece, Spain, and Portugal) wereresponsible for the circumstances that led to and precipitated the crisis, andthere may be fundamental solvency issues that need to be addressed even if theliquidity shortfall is addressed.
Finally, a less well-recognized insight from theeuro-crisis concerns the role and impact of a currency union’s dominantmembers. It is often argued that the United States, as the majorreserve-currency issuer, enjoys what then French Finance Minister ValéryGiscard d’Estaing famously called in the 1960’s an “exorbitant privilege,” in the form of lowerborrowing costs (a benefit estimated to be worth as much as 80 basis points).
There was always a downside – previously ignored but nowhighly salient in our mercantilistera – to this supposed privilege. If investors flock to “safe” US financialassets, these capital flows must keep the dollar significantly stronger that itwould be otherwise, which is an unambiguous cost, especially at a time of idle resources andunutilized capacity.
But, in the case of Germany, exorbitant privilege has comewithout this cost, owing solely to the currency union. Weakness in the peripheryhas led to capital flowing back to Germany as a regional safe haven, loweringGerman borrowing costs. But, yokedto weak economies such as Greece, Spain, and Portugal, the euro has also beenmuch weaker than the Deutschemark would have been. In effect, Germany has hadthe double exorbitant privilege of lower borrowing costs and a weaker currency– a feat that a non-monetary-union currency like the US dollar cannotaccomplish.
The future of the eurozone will be determined, above all,by politics. But its development so far has forever changed and improved ourunderstanding of currency unions. And that will be true regardless of whetherthe eurozone achieves the closer fiscal and banking arrangements that remainnecessary to sustain it.

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关键词：lessons Crisis Lesson Three less its territory elsewhere critical false

While some observers argue that the key lesson of theeurozone’s baptism by fire is that greater fiscal and banking integration areneeded to sustain the currency union, many economists pointed this out evenbefore the euro’s introduction in 1999. The real lessons of the euro crisis lieelsewhere – and they are genuinely new and surprising.

The received wisdom about currency unions was that theiroptimality could be assessed on two grounds. First, were the regions to beunited similar or dissimilar in terms of their economies’ vulnerability toexternal shocks? The more similar the regions, the more optimal the resultingcurrency area, because policy responses could be applied uniformly across itsentire territory.

If economic structures were dissimilar, then thesecond criterion became critical: Were arrangements in place to adjust toasymmetric shocks? The two key arrangements that most economists emphasizedwere fiscal transfers, which could cushion shocks in badly affected regions,and labor mobility, which would allow workers from such regions to move to lessaffected ones.

a crucial feature of monetary unions: free capital mobilityand elimination of currency risk – indispensable attributes of a currency area– could be (and were) the source of asymmetric shocks. Currency unions, inother words, must worry about endogenous as much as exogenous shocks.
Free capital mobility allowed surpluses from largesavers such as Germany to flow to capital importers such as Spain, while theperceived elimination of currency risk served to aggravate such flows.

A second insight from the case of the eurozone,advanced by the economist Paul de Grauwe, is that currency unions can be proneto self-reinforcing liquidity crises, bOf course, the euro crisis was not just a liquiditycrisis. Several countries in the periphery (Greece, Spain, and Portugal) wereresponsible for the circumstances that led to and precipitated the crisis, andthere may be fundamental solvency issues that need to be addressed even if theliquidity shortfall is addressed.ecause some vulnerable parts (Greece,Spain, Portugal, and Italy at various points) lack their own currencies.

Finally, a less well-recognized insight from theeuro-crisis concerns the role and impact of a currency union’s dominantmembers. It is often arguedthat the United States, as the major reserve-currency issuer, enjoys what thenFrench Finance Minister Valéry Giscard d’Estaing famously called in the 1960’san “exorbitantprivilege,” in the form of lower borrowing costs (a benefit estimated to beworth as much as 80 basis points).
Therewas always a downside – previously ignored but now highly salient in our mercantilist era – tothis supposed privilege. If investors flock to “safe” US financial assets,these capital flows must keep the dollar significantly stronger that it wouldbe otherwise, which is an unambiguouscost, especially at a time of idle resources and unutilized capacity.But, in the case of Germany, exorbitant privilege hascome without this cost, owing solely to the currency union. Weakness in the peripheryhas led to capital flowing back to Germany as a regional safe haven, loweringGerman borrowing costs. But, yokedto weak economies such as Greece, Spain, and Portugal, the euro has also beenmuch weaker than the Deutschemark would have been. In effect, Germany has hadthe double exorbitant privilege of lower borrowing costs and a weaker currency– a feat that a non-monetary-union currency like the US dollar cannotaccomplish.