Predictions about the eurozone

Charles Calomiris wrote in 1999 that the euro is doomed (pdf).  Milton Friedman had some pretty good predictions about the euro.  Here are my 2004 predictions about the euro, and here is my bit from 2003 (“The three percent rule is effectively dead…The real question is what will happen when one of the smaller nations thumbs its nose at France and Germany…and then claims exemption from the relevant penalties.”)  I have been worried about euro-like arrangements since the late 1980s.  Here are Paul Krugman’s 1998 remarks, though I am not sure which are his predictions and which are the scenarios he is distancing himself from; in any case he has been critical of the euro on numerous occasions.  In the German language there is Theresia Theurl, among others, and add to that list some number of millions of Brits and Swedes.

How about the course of the eurocrisis?  Here is my piece, “Last Man Standing” (jstor), published in The Wilson Quarterly in early 2009, written in 2008:

It has become increasingly clear that the problems in European governance are severe – and I am referring to the wealthier nations, not Bosnia and Albania. The European nations are tied to each other through the European Union and the euro, but they don’t have a good method for making collective decisions in contentious times.

…Spain, Italy, and Greece, which have all lost their premier AAA credit rating, may require some form of financial aid.  The Germans might look to spread this burden around Europe, but there are few places to turn. France and the Netherlands could chip in, but the hat cannot be passed very widely.

Part of the problem for Europe is that its biggest banks are very large relative to the economies of their host nations – in other words, its component national economies are too small…It’s not widely recognized that Europe because of  its systemic weaknesses, already has required implicit bailouts from the United States.

…Ideally, the ECB should take on a stronger role as lender of last resort in Europe, but the EU does not make such decisions easily.  Fundamental alterations would be needed in the bank’s charter, which was written precisely to make change very difficult, in part because Germany…insisted on biasing the ECB toward conservatism and inaction.  Even if the bank’s charter were amended, the member nations would surely impede any action by bickering over who would pay the bills for new initiatives.  If the ECB is going to run bailouts, decision making will have to become a lot more fluid, and that would require Germany to give up control and the bank to move away from price stability as its sole objective.  Since the EU member states have not been able to agree on a reform of the Union constitution, it’s not obvious they will be able to agree on changing the bank’s charter. They’ve had time – and good reason – to do so, yet have taken no serious action.

Roubini predicted the course of the current Italian financial crisis in 2006.  And so on.

It is sometimes asserted that the economics profession should lose some status because so few economists predicted the U.S. financial crisis.  I’m not sure economists should be judged by their ability to predict asset price movements, but grant the point.  The euro crisis is now here, and it seems our profession should win some of its status back.

Comments

The status point is fair, although it seems a remarkably low hurtle. Much like the "solutions" rumored for the last 6 months, the currency itself was stillborn as introduced. The elite simply played kick the can on the hard choices that were necessary because the resulting lost of sovereignty would have been soundly rejected across the EU.

"  I’m not sure economists should be judged by their ability to predict asset price movements..."

No one is saying they should. What is to be expected is a warning about the consequences if they do move!

Aren't you cherry picking economists who got it right? I suspect someone (not me!) could name 4 historically pro-Euro economists too; it's just that they are out of the limelight for now.

In any case, even if you are right, the profession got one crisis right and one wrong. A monkey tossing coins would be about as good?

Not so much in my country (the Netherlands). During the late nighties there where multiple petitions by (top) academic economists to postpone the introduction of the euro and/or to limit the size of eurozone to sufficiently similar countries (in particular no eurozone with both germany and italy/greece). The economics who supported the quick introduction of the large european monetary union happened to be employed by the government (as either a politician or policy maker).

For example our prime minister at the time (who happened to be an economist as well) forbade any discussion about italy's bugetary problems within his labor party.

And that is the most evident problem with economists. Outsiders can't know who is honest, or who is writting thesis just to support whatever the government is doing.

But people that judge them because of that are wrong. We can say economists are scientists if they get happy when a crisis that they didn't expect happens, and when a crisis that they did expect doesn't happen, and then go out to learn why they were wrong. Lots of respected economists are even refusing to accept that they were wrong about the US, so those are not scientists. (And the amount of things they get right doesn't even enter that test.)

It's true that, as a pro-euro article pointed out, US academic economists were typically skeptical towards the euro, while economists working for the Federal Reserve tended, like their European government colleagues, to be more positive.

Who are the lobbies within Germany that gained from the Euro? If everyone was so sure th Euro was a bad idea and yet it was passed, surely there was some group who was going to benefit?

I think the Euro crisis is so often portrayed as Italy or Greece ripping Germans off. A under-explored aspect is one group of Germans ripping off another.

German manufacturers and labor unions.

'German manufacturers and labor unions.'
Which, along with farmers (who neither gained nor lost anything till this point from the euro), are considered to be the most important elements of both the German economy and, along with the Beamte (whose intra-Europeans vacations have become much more stree free), are consided the most important parts of the German political system.

From a most basic perspective, of course, removing all the true detail. But people who produce something - and union workers are the people responsible for making Porsches, Mercedes, and BMWs, after all - are considered to the bedrock of a productive society. Pretty much everyone else - like bankers - are dependent on them.

That's also the problem with scientists. Ask any trial lawyer.

None of this is science - these predictions aren't falsifiable. "Something bad might happen" isn't a falsifiable prediction. Start giving predictions that involve the % unemployed in 2012, 2013, 2014, and 2015, and then we can actually measure your claim (or any other outcome variable of interest). Without measurement, you have no science.

"I suspect someone (not me!) could name 4 historically pro-Euro economists too"

Not me either. But I can name quite a few who were very precisely predicting the problems a currency union made of countries with no common language, no common work morals and ethics, no common culture will inevitably face.

And most of the German main street people were against this union; they did not want to lose the Deutschmark. Since our politicians knew this dislike, we were never asked if we want to join this club. The German constiution had foreseen a plebiscit for a new constitution once Germany is reunified, but the German political 'elite', all parties from left to right, denies this constitutional right.

The Euro was a purely political thing, in Germany pushed forward by the idiots Kohl, Schäuble and so on. They made sure Germany had to agree to the Euro, otherwise the re-unification would have been blocked (which would have been better, but that's another story).

German re-unification was a bad thing? Can you elaborate? Are there any respectable proponents of this view?

The US has a common language even if not codified, but more and more we do not have a common moral, ethical, or cultural ties. In my current state the sole major metro area and the surrounding countryside inevitably clash in almost every way possible. These are not conditions that make an economic union strong. In fact, the in-fighting is almost certainly a good thing. The problem is the lack of infrastructure to support the currency and disparate political systems that attempted to use the union currency to their advantage. Which for me is the smoking gun. A currency union that is both good for Germany and Greece in good times will be bad for both in bad times. Blaming it on culture is just misunderstanding what culture is.

Good finds, thank you! But, is a prediction validated if it was 5 years early? My apologies, but I am tired of hearing about the "permabear" Roubini and I think as far as predictions are concerned he is a crank. His analysis may be well-informed, but if we take timing into consideration, I do not think he fares well at all.

While there is the commonplace that the stock market has predicted 8 out of the last 5 recessions, I think that this is something different.

If you predict that "the euro makes financial crises more likely, and makes them worse if they occur," then it's not sure how the prediction would have been validated or not.

Also consider that euro proponents were familiar with all the reasons that the euro was perhaps being introduced prematurely, before the free movement within the EU and other things had made it an optimal currency area. Yet, the euro itself was hastening the transformation of the EU into an optimal currency area. Perhaps they felt the risk was worth it; perhaps they could have gotten away with it if there hadn't been a crisis for another ten or twenty years.

I am also reading The Future of Europe, and it seems particular applicable now:
http://www.amazon.com/gp/product/0262512041/ref=s9_simh_gw_p14_d0_g14_i1?pf_rd_m=ATVPDKIKX0DER&pf_rd_s=center-2&pf_rd_r=0EN443YWBZTTEVBPB462&pf_rd_t=101&pf_rd_p=470938631&pf_rd_i=507846

As Russ Roberts and many many others point out, macro economics is not a "science".

Soros cleared a cool billion on the very idea of the euro not working - back in 1992. Of course, he wasn't really an academic, though he funds a number of them globally these days, often in places with deep and recent experience of something distinctly unlike capitalism or democracy.

http://en.wikipedia.org/wiki/Black_Wednesday

Why this episode is so studiously ignored - apart from the fact that it happened so very, very long in the past in American tems - is beyond me.

The flaws of euro go way back - as does the choice between solving them (at least for a while) and letting the euro fade into the ever growing graveyard of no longer used currencies (ask the Slovaks, the Slovenians, the Maltese, the Cypriots ....)

Tyler, you yourself posted about this article in Econ Journal Watch, called "It Can’t Happen, It’s a Bad Idea, It Won’t Last: U.S. Economists on the EMU and the Euro, 1989-2002."

Published in January 2010, it was a bit of triumphalism from European economists explaining that the euro had gone much better than US economists had predicted, listing all the reasons that US economists thought that it would increase the chance of a crisis and make a crisis worse if it did happen.

That bit of hubris was, of course, not too long afterwards followed by the start of the euro crisis.

'’m not sure economists should be judged by their ability to predict asset price movements, but grant the point.'
Why? - the eurogeddon that was also featured with approval here arrives in less than 48 hours, and the euro is up about .4 cents against the dollar, making it up almost 1 cent since the countdown began – http://www.ecb.int/stats/exchange/eurofxref/html/eurofxref-graph-usd.en.html

And let me repeat myself from yesterday's comment on the eurogeddon countdown -
'General reaction to S&P’s actions? – a cynical yawn. It is almost as if people in the eurozone are learning how to ignore the batty uncle in the corner endlessly muttering about the commies under the bed.'

There just isn't the sense of panic that some people feel necessary - like S&P or members of the Obama administration or various bloggers. The EU will compromise and lurch as it always has, as hopelessly incompetent as during the decades it grew and solidified - until the EU doesn't, of course.

It's true, S&P and the others generally move after the market has already given its opinion. It makes enshrining their opinions into legislation even more curious, since if anything the recognized statistical ratings organizations are certainly more vulnerable to political manipulation than the market in general.

While one could concede that perhaps governments might do a better job than the market in recognizing the danger of private loans and equities (though I'd challenge that), I can't possibly see the basis for argument that any government is going to honestly call for the downgrade of itself (or other governments). If anything, they'll threaten, cajole, pressure, and investigate ratings organizations that dare downgrade them or their agencies.

Writes Krugman: " ....Germany's markets, though freer than they used to be, are still ludicrously overregulated by U.S. standards...."

It's strange: when he writes about Europe his inner economist starts to show through his liberal conscience.

While I'll be the first to admit that the following point is often obscured by his polemics, I think Krugman takes a very consistent position - one that is shared by a large number of sophisticated liberals: advocating a (relatively) light hand on regulating markets, especially labor markets, combined with a liberal welfare state. The Nordic model, if you will.

One reason that this is not understood by many on both the right and the left is that "relatively light hand" is not the same as completely unregulated. As much as conservatives are loath to recognize it, compared to much of Europe - and, yes, even the United States 35 years ago - the regulatory burden in the United States (especially regarding labor markets) is relatively light. Obviously not as light as a libertarian would like, but light enough that it is perfectly consistent to favor more or less the current regulatory regime in the U.S. (with some adjustments in both directions), while critiquing the regulatory regime in most of Europe (especially with regard to labor markets).

“sophisticated liberals: advocating a (relatively) light hand on regulating markets, especially labor markets, combined with a liberal welfare state. The Nordic model, if you will.”

With the exception of Denmark (1.91), the Nordic countries do not have unusually lightly regulated labor market.

http://www.oecd.org/document/11/0,3746,en_2649_37457_42695243_1_1_1_37457,00.html

OECD employment protection index 2008:
United States 0.85
Canada 1.02
UK 1.09
New Zealand 1.16
Australia 1.38
Ireland 1.39

Norway 2.65
Germany 2.63
Finland 2.29
Sweden 2.06

Italy 2.58
Belgium 2.61
France 3

“sophisticated liberals” are not excited about any unique Nordic policy model. There is virtually no element of the “Nordic model” that you cannot find in Latin Europe. What liberals love are Nordic *outcomes*.

But remarkable Nordic outcomes pre-date the welfare state, and can be found among people of Nordic descent in the United States today, which suggest they have more to do with culture and social capital than with policy.

Yet liberals like you attribute positive Nordic outcomes to Nordic policy, in many cases contrary to evidence and almost always without checking to see if the outcome was there before the welfare state. This is hardly what I would call a “sophisticated” view.

+1

In fact, if you test income by ethnicity, virtually all of them do better in the U.S. than in their countries of origin (Hong Kong might be the only exception, and notice they are actually more economically free than we are). That is the same as saying that, controlled for ethnicity, the U.S. appears to have the most successful economic system in the world.

Someone pointed out a long while back that for all the bemoaning of racial disparities in America, we have the richest, freest blacks in the world -- but this is actually true for virtually every ethnicity.

Obviously the problem with the German economy is its strong regulation by the measure of US conservative economists is reckless and prevents the kind of fiscal and investment policies seen in the US and Greece that allows conservatives to see high budget deficits by governments, the view taxes are theft and to be avoided at all costs, and the means to prosperity is debt to fund consumption.

if only Germany would have adopted the Reagan-Bush-Cheney-Goldman Sacks view of regulation and deficits, Greece would be struggling with the necessity of bailing out Germany. It should have been Germans building massive real estate developments with no collateral, Germany cutting taxes because Reagan proved deficits don't matter, Germany seeking the advice of US investment banks on how to fund operating expenses with debt while creating the fiction of budget balance.

You do understand Krugman thinks Dodd-Frank doesn't go far enough toward the German regulatory system??

You're conflating different regulatory schemes. It's perfectly consistent for Krugman to, at the same time, favor greater - or, probably more accurately, better - regulation of the financial services industry, while at the same time arguing that certain areas - really we are talking mainly about labor markets - are overly regulated in most of Europe.

It's perfectly fair to argue that many "neoliberals" are too enthusiastic about certain specific forms of deregulation, while recognizing that most European labor markets are over regulated, and that the relative lack of labor market regulation in the United States has been beneficial in terms of growth.

That is to say, not all regulatory schemes are created equally. Some areas are more in need of regulation than others; some ares that ARE in need of regulation could be regulated more smartly.

An obvious point that seems to escape many people.

Of course with regard to the financial services sector specifically, we get in some ways the worst of both worlds - under regulation (of course a libertarian would not agree with this, though even Tyler favors a regulatory scheme that would be tighter in some respects), combined with a very poorly designed regulatory scheme. The reasons for this outcome are left as an exercise for the the reader.

To add. The monetary system in the USA is Government monopoly and is fragile and has severe feedback problems and so even a libertarian might say they better regulate it.

Its hard to compare labor regulation, do you count statutory words (and which ones?), the amount of labor regulators? Who has developed a meaningful comparison of these dynamic systems so that this conversation makes any sense?

One example, France has (or had) a de jure ban on at-will employment, but employers evaded it with part-time or grey market employees. California does not have a de jure ban on at-will employment, but the combination of its litigation rules, and broad protective classes, and aggressive administrative agency is a de facto ban. How do you compare those regimes?

U.S. labor regulation is mainly a state matter and some are better than others, but that's true in Europe. Slovakia, Estonia are as free as Texas.

pfff. Martin Felstein beat all those guys.

He had a special guest article in The Economist predicting European monetary union would fail in 1992:
http://www.nber.org/feldstein/economistmf.pdf

Before or after Soros cleared his billion on the backs of British taxpayers?

Ah, his writing was three months earlier than Soros bank deposit - though which of them was first in terms of using their insight, either to write an academic paper or to clear a billion dollars, is a bit more muddied point to discuss.

Calomiris makes two predictions in his conclusion: The Euro will be a weak currency and it will collapse. The jury is still out on the second point (news about its death are, for the moment at least, still exaggerated) and he was clearly wrong about the first one.

Economists deserve respect? That's a hoot. Sure, some economists are right some of the time, but that just means that economics is a house divided. If there are m issues, there are n economists' opinions, and, with n>m (always), that guarantees that you'll always find at least one economist who's right. But that still leaves the problem of n>m. I remember a joke from grad school: there are only two kinds of economists. Economic historians (i.e., econometricians), and sociologists (public policy types). You can add that, if you don't fall into one of these categories, you're a pretty irrelevant philosopher -- i.e., a theorists. Sociologists and philosophers can't predict worth a nickel, and economic historians can only explain the past. The future? Well, just like the past, plus/minus an error term. An economist who thinks s/he knows how to predict should be on Wall Street making money, not hawking pompous mumbo-jumbo. Most of economics really, really sucks -- and blows hot air.

The establishment of the Euro was always a political decision. The economic arguments were always weak - precisely because the smaller countries were never happy about giving up their fiscal/political and monetary sovereignty.
But I don't understand how you can say that economists shouldn't be held responsible for failing to provide warnings about the crisis in the US. Several leadings economists (including Fed chairs) were on record stating that i) housing prices never fall ii) even if they did the financial sector was structured so that the risks were diversified etc..
That was a huge failure and modern economics should go through a period of reflection and many assumptions should be questioned. The profession failed.

In any undergrad text fannie mae and freddie mac were highlighted as examples of moral hazard.

Tyler,
Can I get you on record about the probability of a US bond default? (I recognize that this is a more difficult prediction than the Eurozone collapse).

Still, what does the world look like if US bond prices start to price in a possibility of default?

Abe

It bums me out that people hate on economists over whether or not they can make predictions. Predictions are a silly business. Anyone who believes they even SHOULD be able to might as well go see their tarot card reader, too.

Isn't it enough that economists can do some good work helping us understand WHAT happened, what incentives were created and/or destroyed and maybe maybe maybe help us write better policy in the future (not that we ever do).

Yes, I am a fan of THE BLACK SWAN. Guilty as charged.

Problem is which post hoc explanation to believe. Or which economist or policy prescription to trust. Predictive power is an excellent test of a theory and hence of the competence of the economist(s) behind it.

revealed preference?

"Isn’t it enough that economists can do some good work helping us understand WHAT happened, what incentives were created and/or destroyed and maybe maybe maybe help us write better policy in the future (not that we ever do). "

That's a great idea, but the implementation to date has been rather spotty. As stated above, there never seems to be a very strong consensus from economists on anything above the basic level. This combined with the inability to predict anything useful reduces the NPV of economists. Possibly to a negative value.

Taleb does not characterize the financial crisis as a Black Swan. He felt it was 100% predictable.

Paul Krugman made this bizarre claim a couple of weeks ago, blaming the Euro on “American right-wingers”: http://www.nytimes.com/2011/11/11/opinion/legends-of-the-fail.html?_r=1

““attempt to create a common European currency… was cheered on by American right-wingers… And it was questioned by American liberals, who worried — rightly, I’d say (but then I would, wouldn’t I?) — about what would happen if countries couldn’t use monetary and fiscal policy to fight recessions.”

Krugman wrote in 1999: http://web.mit.edu/krugman/www/euronote.html

“For all the seven long years since the signing of the Maastricht treaty started Europe on the road to that unified currency, critics have warned that the plan was an invitation to disaster… Well, here we are, right on the brink of the creation of "euroland", and it is now clear that none of the problems EMU critics have warned about will arise, at least for a while.”

The same year Krugman wrote another article titled: “Don't worry about the euro” (mainly about the effect on the Euro on the U.S).

Milton Friedman, Martin Feldstein, Calomiris and other leading American "right-wing" economists were more prescient about the Euro than Paul Krugman, going on a limb (Friedman in particular got a lot of scorn for his predictions). Even when retroactively cheating to make himself look better, Krugman cannot stop himself from demonstrably false slander of right of center economists for the benefit of NYT readers.

By letting him get away with this kind of childish behavior the economist profession is acting as enablers of Krugman's pathology.

Well, is the sustainability of the Euro an economics problem, or a political problem.

I think economists have to be respectful of the domain on which they are speaking. If the Euro is grounded on a political problem of sovereignity, then they are no more knowledgeable than the man on the street. If it is grounded on economics and models, then they have something different to contribute.

Some economists think they are political theorists.

While reading your post I kept thinking how, pre-EU, several of my undergrad profs warned that monetary union without fiscal union was a recipe for disaster. For a moment I'm lead to think, "yay for Economics". But then I quickly realize what is the value of diagnosing a dismal outcome if the counsel is not heeded. Admonishing the patient will do little good.

Using the medical profession as an analogy, illnesses can be prevented, as well as cured. But preventative and curative measures are only effective in so far as the patient heeds the doctor's advice.

I'm reminded of cultural barriers healthcare professionals sometimes encounter in their profession and wonder how can Economics better overcome similar barriers it faces.

...but it's *Charles* Calomiris.

It's amusing to see supposedly rational people inadvertently incurring in massive confirmation bias and not even trying to make the effort to avoid it.
If the euro stays around for another 10 years, will the Cassandras recognize that they've been wrong all this time?
As an economist, my prediction is that no, they won't.

Nope, they will say that they were proven right. After all, was there not some major crisis? Even if that crisis is somehow effectively dealt with, economists will claim that the solution, whatever that turns out to be, moved Europe away from the very problem upon which the economists' criticisms were based. That Europe addressed their concerns will prove to the economists that their concerns were valid. They will say something along of the lines of: "the Euro was preserved but at the expense of state fiscal sovereignty."

I I think it's important to add that such claims will be correct. The only way for the pessimistic predictions regarding the Euro to be disproven at this point would be for the Euro to survive without much greater fiscal integration. But I think it's pretty clear at this point that the only hope for the Euro to survive will be with much greater fiscal integration.

This implies that claims must be stated in terms of increased stress levels or crisis events. If a stop light is placed in the middle of an otherwise busy and uninterrupted highway, one can easily predict that it will cause problems. However, one cannot as easily predict whether the problems will come in the form of blown stop lights/increased law breaking, pileups when some people try to stop and others don't, a general slow-down in traffic, traffic diversion to other uninterrupted highways or what have you.

In this case at least your analogy fails. The pessimistic predictions got the nature of the problem precisely right.

I suspect that the smarter advocates of the Euro also were aware of the problem - this isn't a case where the basic problem is obscure or requires sophisticated knowledge of economics. Even a non-economist (I'm not one, though I have some long ago undergraduate training thereof) can understand the fact that monetary union without fiscal union HAS to lead to a crisis eventually. I suspect that advocates of the Euro hoped/believed that fiscal union would follow, perhaps impelled by a crisis. Which might also be a correct prediction.

Of course the very obviousness of the pessimistic predictions perhaps takes somewhat away from the credit that Tyler wants to assign to the profession.

The Euro wasn't pushed through because of better potential economic outcomes for citizens, but by elites wanting more power, above all else. If that meant in the short-run accepting Germany's average joe or outdated euroskeptic economists' conditions, fine. In the long run, they knew the project would be too big to fail. If the union becomes more integrated and the German people acquiesce, the elites are a competitor on the world scene with the US and China. Playing with the big boys is so much fun.

> Predictions are a silly business. Anyone who believes they even SHOULD
> be able to might as well go see their tarot card reader, too.

Yay! Tell that now to all those silly physicists and chemists! "...How the hell was I supposed to predict that thing would go BOOOM? Predictions are a silly business!"

Physics and chemistry are based on science, with reproducible experiments and falsifiable results. Macro economics is not a science.

In science, nothing is ever truly "settled" although many "laws" are commonly accepted by all the practitioners in the discipline. (Until proven wrong.)

See, e.g., "Taubes on Fat, Sugar and Scientific Discovery," with Russ Roberts on EconTalk
http://www.econtalk.org/archives/_featuring/gary_taubes/

"Physics and chemistry are based on science, with reproducible experiments and falsifiable results."

Is astrophysics an experimental science? Meteorology?

Maybe its more useful to distinguish between "engineering science" and "theoretical science". Engineering science makes stuff that works and theoretical science tries to explain why it works. You don't need the second group for the first (e.g., people made telescopes before understanding retinas), but its an important relationship (e.g., because the second group told the first to stop putting leeches on people).

In that formulation, my wild-ass guess is that professional economists working at private firms, like consultancies, lean "engineering science", helping firms implement discrete systems or reforms. Public economists (academic, government) probably lean "theoretical science", offering generalized theory in the game of competing academic schools or the game of political preservation and advancement. But I don't know.

But without the first group, the second one can't be more than a cult. Are those two kinds of economists you cite talking?

Mishka is right, and if you think previsions are a sily business, you are not doing science.

"based on science" != "science". if a practitioner of a discipline claims that its predictive power is similar to tarot cards, that should give one an idea.

i have no idea of predictive power of meteorology, but astrophysics has predicted very many things right (starting with lunar eclipses in Almagest and on...).

Astrophysics, very much so (for instance, we can predict where Pluto will be in 20 years, and then test that).

Cosmology, somewhat less so, but there are some things like certain aspects of cosmic background radation that were predicted and then found.

The consequences of the U.S. mortgage bubble and the 1998 financial deregulation were simply worse than those associated with the introduction of the euro, even more so as we have no idea how the current crisis will play out. In fact, one factor in the European crisis is European banks holding lots of bad US collateralized mortgage debt!

The oversized and underregulated financial sector, large amounts of government debt, unsustainable pensions and transfer payments, use of ridiculously sized bailouts as the first, second, third, and last response to the crisis, and so on are common both to continental Europe and the Anglo-American countries. So you are asking to give a few economists credit for noticing that these things might be a problem in continental Europe while ignoring what was going on in the U.S. and U.K.

Other commentators have pointed out that alot of pessimistic forecasters had decent analysis but got the timing wrong. If an engineer points out that the levee is not strong enough to hold back a once-in-thirty years flood, the fact that he can't predict the exact date of the flood is irrelevant. The point that the levee is too weak stands.

One seriously has to wonder if Paul Krugman is even sane. It is difficult to square what he was writing in the run-up to the introduction of the Euro itself with what he is claiming in hindsight about critics and proponents of the Euro pre 2000. Tyler Cowen is correct about that 1998 essay- it is impossible to pin Krugman down on what he believed at the time. In any case, that 1998 article was Krugman at his best, and it is a shame that that writer no longer exists.

What was even more interesting was the link within the link Tyler provided from his own prognostication: Link

"One seriously has to wonder if Paul Krugman is even sane."

Of course he's sane. But he's a partisan. He doesn't care about being right or wrong nearly as much as he cares about swaying public opinion. As such, propaganda is far more useful than measured thought. Sure his articles are full of comments that are factually correct and in some cases ever contradict his own prior assertions, but many of the people reading his posts are looking for confirmation bias, not the actual truth.

Meant to say factually incorrect above.

Too bad committees hate to make painful decisions since all "solutions" to the problems of the EZ have pretty much negative endstates.

IMF: future long term provider for the EZ....

Feh. Economists--what do they know? More impressive by far is Nigel Lawson's (an actual practicing politician and former UK Chancellor of the Exchequer, i.e. finance minister) prescience as far back as 1998--as shown in this interview he gave The Spectator (the London one):

http://www.spectator.co.uk/coffeehouse/6853193/from-the-archives-nigel-lawson-on-the-euro.thtml

I also recall--though I cannot find it online--that he was quoted as saying (I am paraphrasing this from memory) that "For eleven countries to lash themselves to the mast of a common monetary policy while allowing each to continue its own independent fiscal policy is to leave the entire structure hostage to the least macroeconomically stable among them."

I think if financial bloggers and their readers could figure out there was a housing bubble dangerously intertwined with baroque financial instruments, there's no excuse why a majority of economists couldn't have done so.

As for restoring reputation...imagine a drunk captain only crashed one measly oil tanker on his dozens or hundreds of voyages. Do you give him another shot?

The chorus of euro-skeptical economists is a good start, but it's a long, long way from convincing me and a lot of other people that the modern "discipline" of macroeconomics has anything reliable to say about the world.

I'll stick with Intrade than a probability given by an "expert" or a committee of "experts."

http://www.intrade.com/v4/markets/contract/?contractId=713737

This 1998 Foreign Policy piece on Jeffry Frieden's website also looks pretty good right now and states that "Economists agree almost unanimously that the purely economic benefits of establishing a monetary union do not outweigh the costs...":

http://www.people.fas.harvard.edu/~jfrieden/Selected%20Articles/Articles/euro.pdf

Mundell laid the foundations for the euro. And iirc he won some little prize called the Nobel.

Ah, srini, someone to stand up for the euro.

Probably they should have been more careful about letting some countries in, and Greece was not let in initially, only later on the basis of what we now know were fraudulent official stats. Take Greece out of it, and it is not at all clear that the euro is in all that bad shape. Has not collapsed all that much so far, has it?

People continue to rag on Italy, but I repeat what I have said here several times: Italy is running a primary surplus, and Spain was running a full surplus prior to the crash. Both are arguably in better shape than the US or UK or Japan fiscally. There is a panic started by the Greek situation (and aggravated by crashes in Ireland and Portugal) that has pushed up interest rates for the bonds of Spain and Italy. But without those high rates there is not any obvious reason why either should be anywhere near a default.

Too soon to crow to loudly about all the forecasts of the end of the euro, although clearly there are major problems, and many of those mentioned by Tyler (including he himself) pointed and warned of them ahead of time.

The fact that Italy is running a primary surplus right now is no more positive that the fact that a suicide jumper is still flying in the air and the pavement is yet 100 meters away. Technically, he is still alive and unhurt, and for a few seconds he still is going to be.

Given the demography of Italy, it is a long-term slow-motion train wreck. It is already bad enough to have an aged population where ratio of working vs. nonworking population is on unprecedented level. But with a huge heap of debt as a bonus, it is catastrophe in waiting.

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