Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday 24 May 2016

Is the Eurozone dying?

In a recent article, Larry Elliott from The Guardian wrote this about the Eurozone:
“The eurozone is economically moribund, persists with policies that have demonstrably failed, is indifferent to democracy, is run by and for a small, self-perpetuating elite, and is slowing dying.”

He describes this as the elephant in the room in discussions over Brexit.

I have some sympathy with this, but with one crucial difference. I do not think the Eurozone is slowly dying. I also differ from many who think it will escape death by morphing into a full fiscal and political union any time soon. Instead I think the Eurozone will continue in something like its present form for some time (decades rather than years): a monetary union with fiscal and most political decisions at the national level.

In terms of macroeconomics there is no obvious crisis that will lead to its demise. As I have noted recently, I think it is more likely that we will see reasonable (or better) growth over the next couple of years. Yes unemployment will remain too high and this is a shockingly unnecessary state of affairs, but as the UK discovered in the 1980s it is not one that threatens the existing social and economic order.

The Eurozone’s treatment of one of its own members, Greece, is intolerable: I have compared the Troika’s treatment of Greece to British actions during the Irish famine. But that does not mean it will not continue. I was surprised at Germany’s willingness to countenance Grexit and the desire of the Greek people to remain. As an economist might put it, the resulting situation may be incredibly suboptimal (even in a Pareto sense), but it looks like an equilibrium. In simpler language, virtually everyone could be better off by doing something different, but unfortunately the only people who might be better off by continuing the status quo are the politicians in control.

The biggest threat facing the Eurozone right now is not economic but political. It is dealing with migration and the associated rise of the far, and often Eurosceptic, right. That challenge will ensure that no one will risk further union, even though it is indeed the prefered option of many in the governing elite. The threat to liberal democracy posed by not only these groups, but also the current governments in Hungary and Poland, is worrying indeed. But so is the possibility of Donald Trump as POTUS.

What does the likely survival of the Eurozone in something like its present form imply for Brexit? My own view is not much, because our opt out from the Euro is safe. On other matters? I have spent much time on this blog and elsewhere criticising German macro policy, but that largely influences the Eurozone. On issues that do influence in the EU, German policy often puts the UK to shame, such as on the environment or migration. It was also the EU that legislated to cap bankers bonuses, a measure which George Osborne tried everything to reverse. On issues like this political cooperation across borders is vital because we live in a globalised world where capital is highly mobile.


  1. How many people have died in Greece due to troika's policies? Irish famine killed 1 million people and forced another million to emigrate. Isn't the comparison a bit stretched?

    I agree the ECB in particular was slow to react to the crisis and that it caused unnecessary economic hardship, but there must be some sense of proportion. I think without Trichet history would have been very different. A more accommodative monetary policy would have supported all european economies, weakened the euro, raised inflation and made price adjustment much easier. I think the lack of tools was a lot less important than the lack of use of the tools they had. They hiked rates while the rest of the world was still in the middle of the biggest monetary expansion ever witnessed. I agree that a bad framework makes errors even more painful, but the biggest single cause of the crisis was the wrong conduct of monetary policy. It made everything else so much harder.

    I agree that German macroeconomic stance tends to be way too obsessed with monetary stability, but I think Schauble was likely right that Grexit was the best solution to the crisis. The alternative large fiscal transfers have no support in most other countries, even if it's likely they would have been relatively cheap for the other countries. Are you saying that the electorates should have been entirely ignored? How do you reconcile that?

    1. As I said in that post: "Of course the Irish famine is different in degree and form to the difficulties being faced by many in some Eurozone economies. But the similarities should worry us." I then go on to point out the similarities.

      Greece should have defaulted on its debt in 2010. Instead Eurozone governments foolishly lent Greece yet more. Insisting on even more austerity and not writing that debt off inflicts harm simply so that those Eurozone governments save face.

    2. " ...inflicts harm simply so that those Eurozone governments save face."

      o.k. you could say that the Germans are waiting until the next elections to grant some debt relief (maybe Merkel thinks this way) but I strongly believe that Varoufakis is right and that, at least for some evil politicians like Schäuble, Greece is not merely a collateral damage, it is used as a deterrent to show other potentially recalcitrant countries what will happen to them if they rebel.

      I mean, I understand debt relief may be hard to sell to the German electorate after they have been fed with Greek-bashing for years. But what's the point to insist on a 3.5% target and automatic spending cuts? Everybody understands that it is self-defeating. It is simply a punitive measure to scare the Portuguese, the Spaniards, etc.

    3. Many people are dying here (in Greece). Many won't give birth to children so a generation wouuld be lost. Many emigrate to other countries. In the future the population of Greece would be reduced to half.
      EU shows no mercy. Even the winners of WW2 didn't treat like this the Germans.

  2. Why is capping banker's bonuses a good thing? If you want a financial capital of the world, setting a sort of 'maximum wage' is not the way to do it.

  3. "He describes this as the elephant in the room in discussions over Brexit."

    It is. There are no risks of leaving the EU.

    Things will bumble along as they did before and slowly change over time as the freedom to control the borders and make our own laws take shape.

    Given how much effort is being made in reinforcing the status quo because of 'risks' why would anybody in the EU take the 'risk' of changing anything they don't have to?

    Don't rock the boat. Avoid changing the status quo. The price of things may change and business might get hurt.

    And they will still be locked into a deflationary treaty with no capacity to offset those changes. And they are conservative to a fault and lobbied to death by big business.

    So no the EU won't rock the boat at all. Because they like change and adjustment even less than the British.

    1. The statement “There are no risks of leaving the EU” illustrates the rose-tinted naivety of too many of those advocating Brexit. Any decision of this magnitude carries significant risks and it is wilful blindness to pretend otherwise. The immediate risks – in current political circumstances with Brexit dominated by the right wing – include tightened austerity (a warning given to the TUC last week by John McDonnell and confirmed yesterday by the IFS), an assault on worker and consumer rights (the main worry of the TUC and most unions) and increased hostility to perceived ‘foreigners’, millions of whom are actually UK citizens, plus the risk of political instability and further encouragement to right-wing populists after their near win in Austria.

      Those in the labour movement supporting Remain are not showing the same naivety. We are well aware of the EU’s failings and uncertain over whether or not those can be changed. Tim Roach, the new General Secretary of the GMB, has explained that after much hesitation his union is now campaigning for ‘Angry Remain’, no illusions in the EU but a judgement that today the risks of leaving exceed those of remaining.

      There is far too much exaggeration on both sides in this referendum and ‘no risks’ is one version of that.

    2. My point is these things are the decision of the UK government. All the remain arguments apply to the EU more so than they do here. They would remain tied to an EU treaty that binds their hands. Why would a conservative organisation under severe economic stress change direction so abruptly given the 'risks' and 'fear' in Brussels, when they would have no freedom to change direction?

      There is no argument that the EU would impose sanctions on the UK. It's a completely ridiculous idea that is floored by the remainers' own beliefs.

      "include tightened austerity (a warning given to the TUC last week by John McDonnell and confirmed yesterday by the IFS), an assault on worker and consumer rights (the main worry of the TUC and most unions) and increased hostility to perceived ‘foreigners’, millions of whom are actually UK citizens, plus the risk of political instability and further encouragement to right-wing populists after their near win in Austria."

      We have an election in 4 years. One where we can change course.

      None of these things actually have to do with exiting the EU. The austrians can vote for who they like.

      The EU commission, the ossificiation of the treaty and the supremacy of the ECJ make the EU system one that is 'rule by betters'. And the term for that is 'aristocracy'.

    3. Sorry but this is a very insular view. Austria may be 'a small country of which we know little' to quote Chamberlin on Czechoslovakia but it's foolish to think we can pull up the drawbridge and isolate ourselves from what happens the other side of the channel. There is a real risk of Europe pulling itself apart in the copming years and Brexit will not help.

      I don't understand your argument about the EU treaty. If the UK leaves, then it will no longer cover us and we shall have to renegotiate our trade arrangements with the EU of 27, every one of which will have a veto, which makes the outcome uncertain.

  4. The intended outcome of both German macro and migration policies is to push the Euro electorate to the far right. Played for, and got.

    Once the National Front etc are safely elected, the helmetheads will change policy to accommodate.

    I mean seriously, who could have known that purposefully creating an ongoing depression and excess unemployment may affect voters.... Except anyone who has read any European history.

    Mutti has a lot to answer for.

    1. A like-minded reader... But as someone (Varoufakis again?) recently commented out, her horizon is the next 3 months. It's all about kicking the can. In my opinion the real dangerous people, those who are actively pursuing the agenda you described are Schäuble and his ilk. People like the star economist ("policy entrepreneur" might be a better description) Hans-Werner Sinn, and the folks suing the ECB about the QE...

      These arsonists are so shameless as to warn the ECB that trying to do something against deflation will boost... the German far-right (AfD)!

      Mr Sinn recently explained that the hyperinflation of the 20s in Germany was the main driver behind the rise of an infamous "Bauernfänger" (a con man). O.k. he's not the first to say that and it also has been pointed out many times that between hyperinflation and the national socialists there was Brüning and his deflationary policies (see e.g. so that this causality is very dubious. But perhaps even more disturbing is the characterization of you-know-who as a "con man". This is now beyond the scope of economic discussion but you see what kind of narrative it fits...

  5. SJW: "Instead I think the Eurozone will continue in something like its present form for some time (decades rather than years): a monetary union with fiscal and most political decisions at the national level."
    That's a possibility, but acceptable IF AND ONLY IF member states recover the ability to pursue reflationary economic policies

  6. Excellent analysis. But I see a contradiction of this paragraph with the rest:
    "The biggest threat facing the Eurozone right now... Is political". I agree. But precisely that risk can put the euro in n the earth rightly. Take Spain for instance. After five electoral regional and general process last year, and 6 month without government, we'll have general election in June, 26 (three days after your referendum). There will be no post electoral agreement between parties, sure but, in case that there is one, I will be a very unstable government. Catalonia problem is run out of control for any future government.
    Austria is divided in two part, one of which is near fascism. What about Madame Le Pen?
    I don't see very probable that the mediocre status quo could endure very much. Everywhere, I buy your grey optimism.

  7. I came across the world Economic Forum website which listed the ten most competitive economies. In the top ten were five EU members (UK at 10th place) and three of them were members of the eurozone.

  8. "On issues like this political cooperation across borders is vital because we live in a globalised world where capital is highly mobile."

    Is it really necessary for UK to be part of the EU bureaucracy for this to happen? Us and Septics spy on our own populations & Europe without them being in EU.

    I can see why people want to stay in the EU but the idea we would all stop talking and start non co-operating is surely nonsense and palpable nonsense. BrExit yes or no is overblown - only the fringe loons on right who opted to lead and kill Exit campaign with nonsense about Trade Deals think anyone wants large changes either way.

  9. As always a very good article. I would disagree with Germany's record on the environment though. They've built loads of renewables, which is brilliant. But they still burn a lot of extremely dirty lignite, which is usually mined locally. Germany (and most countries) has also done very little to reform the emissions trading scheme. The ets is a huge failure. The UK's carbon price floor has at least encouraged switching to gas from coal, although our record on renewables and environmental policy is still shockingly bad.

    1. Right and you can't expect Europe to do much about climate change as long as its economy remains in limbo. I recently read that the air quality is now worse in many European cities than in North America and it is hardly surprising: look at the Volkswagen scandal.

      In the end everything is tied together. If it proves so difficult to accept migrants, it's largely because of the high unemployment rate in most eurozone countries.

      If politicians were a bit more clever Germany could have accepted a pan-european green stimulus program in exchange for redistributing the migrants.

      But I am already dreaming...

  10. Dear Professor, I am always surprised by your optimism about the EZ, despite all the damage it is causing to workers and unemployed throughout the continent. However this time I would like to point out an issue you seemed to have overlooked: it is not true that the macro policies of Germany do not influence the Uk. For as long as Germany forces the entire EZ to pursue export surpluses, this does affect the UK. It affects it a lot. As Michael Pettis always insists, a deliberate decision of a country to supress internal demand has inevitable spill-overs on the other countries. This is especially true when the "country" in question is half of the European continent. In the UK the EZ policies translates into higher unemployment and indebtedness that it would otherwise be if the EZ pursued a more balanced economic strategy.

  11. I do think the euro was a fundamental mistake: premature, ill-designed, and extended to far too many countries. Economics does influence politics: if the anti-euro far right comes to power it will not be only because of the migration and immigration question, and "Islam", it will be because of high unemployment, mediocre or no growth, the destruction of enterprise and hope, and that, in considerable degree goes back to the euro and to Germany's deflationary policies. So, yes, the euro may limp along, doing horrible damage, or it may, through politics, bring about, through the rise of the nationalist right, its own destruction, and, with that, the destruction of much of the EU and the European project. The German attitude is in some way strange; Hitler came to power much more, I think, because of Brunings austerity, than because of the great inflation a decade earlier. [No, Marine Le Pen is not Adolf Hitler, just to be clear]

  12. "What does the likely survival of the Eurozone in something like its present form imply for Brexit? My own view is not much, because our opt out from the Euro is safe."

    A Brexit would be the first EU shrinkage event. It has been monotonically expanding. Then the direction shifts? Until that first actual shrinkage, shrinkage is unthinkable, then it becomes just another choice for national managers to consider in their bag of tricks.

    Thus it seems to have significant risk.

  13. There was recently a poll cited by Wolfgang Münchau. Let me quote:

    "The new Eurobarometer gives a depressing picture of European youth especially in peripheral countries struggling with high youth unemployment: nine in ten young Greeks aged 16–30 feel marginalised in their own country due to the economic crisis. This is followed by Portugal (86%), Cyprus (81%) and Spain (79%) and Italy (78%). On the other end of the scale, a majority of young people don’t feel marginalised in Germany (69%), Malta (62%) and Denmark (63%), according to Macropolis."

    These southern countries represent 127 Mio of people. Even if the economy improves a little you will still have millions of young people who will get 30-something, still living with their parents, having never worked and with no prospect to find a job. I am not sure if it can go on for ages. I certainly hope it can't.

    It looks like Portugal is next in line, having been warned that its bonds may not be QE-eligible. Then it will need a "program". Varoufakis warned us that the terminal station of the Troika bus is Paris...

    Now look at the situation there. You have a lame duck "socialist" (sic) government struggling to impose what is left of its labor market reform.
    Hollande is one of the most unpopular presidents but strangely enough it will not benefit the (virtually non-existent) anti-austerity left but the right and far-right. Now good luck to the right with the structural reforms!

    So Simon may be right but I really hope he's wrong and we have some serious crisis sooner rather than later because if it goes on for too long it will get worse and worse and worse...

  14. My worry is that the elite have once again hijacked this debate. Guess who they asked on BBC about the effect of EU immigration on the local workforce this morning: Answer, Jonathan Portes - the same person who did not advocate transitional controls with the expansion of the EU and said no-one would leave Poland. In many ways this false information that downplayed the likely surge in immigration (which is of course what we got) is really what forced this Brexit referendum in the first place! He was presented as an impartial observer. I doubt this guy has ever been out to Kent and Essex and met people forced out of London due to high costs and low wages.

    It is a classic case of the close-knit relationship between banks, the civil service, academics, academics and the media that controls information and leads to a narrowing of perspectives and the setting of agendas. The people affected by this agenda are just not heard.

  15. "This is a case of academic economists catching up with what the median blue-collar worker has known for a long time. The U.S. lost jobs to China and the average American worker was not compensated by the winners. And there were winners." (Roger Farmer).

    Sociologists, anthropologists and historians have also suspected that the neo-classical theory of trade was suspect. Economist's ignorance reflects reliance on theory and raw data and a lack of real fieldwork. Portes and Dustman use neo-classical theory to play down the effects of huge EU migration on low skilled workers and the unemployed in the UK. I suspect their models and 'evidence' reflects this theory and the way they do their work. There are other factors creating inequality in Britain, but labour flows sensibly have to be considered seriously as being part of it.

  16. Sir,

    >> German policy often puts the UK to shame, such as on the environment or migration.

    I am surprised by this statement. Germany's recent migration policy has been shambolic at best, if not downright criminal. First, it declared it would welcome as many refugees as it could get, setting in motion a massive movement of people, especially those displaced by the Syrian conflict. It then got quickly overwhelmed, and shut the doors, resulting in thousands of people sloshing around Central Europe. The consequences of its careless invitation created a humanitarian crisis in Greece, and illustrates another of the many European asymmetries; namely, the Schengen area immigration policy is determined by a country that has no active Schengen border, so doesn't need to police it.
    The deal reached to stop the unmanageable flow of migrants from Turkey gave Ankara the power to blackmail the EU, and access to its request for visa-free travel. Thousands are still encouraged to set out on dangerous journeys across the Mediterranean by the reckless promises of Frau Merkel.
    Last but not least, the apparent German generosity in welcoming so many migrants is only due to the desire to compensate for unfavourable demographics, and keep its labour reserve army well stocked. There are news of migrants being employed for one Euro an hour, to facilitate their 'integration'. Germany welcomes migrants only because they help compressing its wages, and this in turn will keep feeding its obscene trade surplus. Thus, Germany Euro policy influences not just the Euro zone, but Europe at large.

    I am not sure how this could be taken as an example.



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