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.


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