Hugo, a loyal MR reader, asks:
…based on this sentence: “I am pessimistic about the survival of the full eurozone, which is not the same as being pessimistic about Europe”
What’s the non-pessimistic, post-Eurozone scenario?
Wouldn’t that leave Greece and Portugal and maybe a couple of others as the Euro equivalent of the US Rust Belt, but with no federal support & much-reduced ability for people in those countries to migrate to areas where there is job growth?
Greece has made very good progress on cutting spending and limiting patronage (where is the Cato study?), although the whole package probably can’t work in such a deflationary environment, not to mention the riots in the streets. They’ll probably have to give back at least a third of what they have done on the reform side, but a lot of inefficiency has been rooted out for good. The country doesn’t have to have a miserable future, just look at recent Turkish growth. Of course Greece needs to default (again, and less selectively) and that will require in the short run yet more spending austerity because the borrowing still is financing their current budget.
Portugal made significant economic gains before joining the eurozone. Its manufacturing probably won’t come back but old people like the place and that will continue to help them as Europe ages. They can sell real estate and vacations and produce services and a bit of agriculture. Neither Greece nor Portugal faces much risk from Chinese or Asian competition; those “Rustbelt” problems lie largely in the past and have already hit them and been absorbed.
EU subsidies are not the path to wealth and in part they lock those economies into low-productivity growth ag. sectors; that’s a mixed blessing. And who says a eurozone implosion would cause those subsidies to go away? Northern Europe already has allocated that money and perhaps wishes to retain influence over their neighbors, maybe all the more in a volatile environment.
Portugal is not reaping major gains from the right of its citizens to migrate to Germany and besides maybe that won’t go away. Schengen could fail and Germany still might prefer Portuguese immigrants to the relevant alternatives.
Currency depreciations of 40 percent or more won’t hurt Portugal or Greece!
By no means am I an extreme optimist about these countries, but I think they will do OK, at least once they get past the short run. Why shouldn’t they? Human capital levels are not superlative but they are entirely acceptable for mid-level European existence and the climate is superb in both places. All they have to do is wave a magic wand and imagine themselves outside the eurozone, and outside their current fiscal shortfalls, just don’t ask me how they get there.