Austan Goolsbee on why the euro zone won’t survive
Austan Goolsbee is the former director of President Obama’s Council of Economic Advisers and an economics professors at Chicago University’s Booth School of Business. On Monday, he published an op-ed on the crisis in Europe that made some provocative points, so I asked him to expand on them in an interview. I think it’s fair to say that Goolsbee is not an optimist when it comes to the euro. The problem, he says, is that even if you recapitalize the banks and end the runs on government debt, you haven’t solved the region’s growth problem. A lightly edited transcript follows.
Ezra Klein: You wrote that “Germany’s currency has been to Southern Europe what China’s has been to the U.S.” Unpack that a bit.
Austan Goolsbee: Germany’s productivity has gone way up. Normally, that would mean their currency appreciates, which lessens the advantage that gives their economy [in exports]. But unlike virtually every other advanced country in the world, the manufacturing share of output in Germany has risen over the last 20 years. And part of the explanation is that, just as in China, Germany has an export-oriented growth strategy fueled by a currency that’s undervalued. But that undervalued currency has been at the expense of Southern Europe. And the main point of the piece is that there’s no obvious way for Southern Europe to grow, and if they can’t grow, they can’t balance their budgets no matter how much austerity they engage in.
EK: Sebastian Mallaby wrote that between August 2009 and May 2011, German exports jumped 18 percent. If they hadn’t been in the euro, they would have only risen by eight percent. So Mallaby’s take was that one way to view the issue is that the euro has been making Germany richer and now they need to share that wealth.
AG: There’s no question that that’s one element. Now, I think to Germany’s credit, they have been quite disciplined over the last 10 years to get a great deal of productivity growth without a large acceleration of wages and that has made them more competitive. But look at the case of East Germany. They got locked in with West Germany at an overvalued exchange rate, and it was devastating to employment in East Germany. But the German people provided subsidies in the trillions of dollars for an extended period of time. The Germans are correct to say that the E.U. does not require them to do that for the rest of Europe. But the underlying principle isn’t very different.
EK: Doesn’t that speak to the importance of a common culture? You never hear residents of Texas or New York complain about all the help they’re functionally giving to Nevada and Florida. But it’s not an entirely different situation.
AG: That is partly institutional design, though. If we had to have votes in Texas about helping Nevada, they would be pissed. But we don’t have to have votes about that.
But this gets to a central insight about currency unions. At the time of the formation of the euro, I would say most American economists said that’s not a good idea, that’s not a currency area that makes sense. And the answer from Europe was, how is Missouri and Mississippi a currency area? But the flaw in that was not recognizing the importance of mobility. In Michigan, in the mid-’80s, the unemployment rate goes way up because a lot of factories shut down. And then, the mid-2000s, to pick a date, the unemployment rate in Michigan isn’t that much higher than in the rest of the country. But the main way that happened is people moved. What makes us a workable currency area is that people can move around. And that happened in East Germany too. They could move around. But the Greeks don’t even speak the same language as the Germans. Seven million Greeks can’t pack up and move to Germany. So low mobility, plus having the wrong currency values, plus no subsidies, is a toxic mix.
EK: A UBS report made the point that the euro was really sold in terms of its exchange-rate benefits — how much easier it would make trade between European nations, that kind of thing — and the fact that it was a monetary union, where all these countries would have to share one monetary policy, was downplayed. Elites probably understood that, but in UBS’s estimation, the populations didn’t. But that seems to be what’s causing the problems here, right?
AG: There were also financial benefits to Southern European countries, and small ones especially, like Greece. Investors saw that they designed the euro to be impossible to get out of and therefore assumed that if the Greeks started spending beyond their means, they would still have to pay the money back, and so the Greeks were able to keep borrowing at low rates. And beyond that, Drachma-denominated Greek bonds are not a very liquid market. A lot more people are willing to invest in bonds denominated in euros. And there was the fiscal discipline argument, which is that this tied the hands of countries the market hasn’t always trusted, which also helped them borrow at low rates.
That style of argument ironically remains today in the sense that a lot of Northern Europe thinks this is all a spending problem that could be solved if the Greeks and Italians would just cut their budgets. But I think they’re missing the monetary side.
EK: Are you of the camp that thinks the European Central Bank could end this if it wanted to?
AG: No, I’m not. Europe has two-and-a-half crises it’s facing. The first is an immediate banking crisis very much like our crisis in 2008. A large number of their financial institutions are viewed as being insolvent. That run has already begun. It’s slow, but it’s there. In my opinion, they will have to recapitalize their banks, one way or the other. Second crisis, which is related but distinct, is the fiscal crisis. There’s sort of a run on the public issuance of new debt.
So one is a toxic, existing asset problem, The banks hold all this sovereign debt, and as the value of all that existing stuff goes down, that’s almost exactly parallel to mortgage-backed assets going down in 2008. But then the governments of Southern Europe have to fund themselves, but they’re having a hard time doing that. And in there is the Northern European viewpoint that this is just a spending problem. And that leads to the half crisis, which is that they’re not growing. The normal thing you would do, which is devalue and have an export-led growth strategy, is impossible, and therefore someone has to have an explanation for how these countries will grow. Otherwise, we’ll just repeat this again and again.
EK: So is there any way to hold the euro zone together?
AG: No, there probably isn’t. If you look at the history, there have been places where what would seem to be not-optimal currency areas have stayed together. North and South Italy would seem to be one. But those tend to entail large, permanent subsidies from the rich side to the poor side, and a general social willingness to put up with these vast differences, usually because they’re all of the same nation state, and you have that mobility aspect. It’s harder to apply that model to Europe.