Pascal Salin is a distinguished French economist. I met him many years ago at a conference and subsequently corresponded with him. He was also a contributor to Business Cycles and Depressions: An Encyclopedia which I edited. His op-ed in Thursday’s Wall Street Journal is a cut above the usual fare in the Journal‘s opinion section.
Salin correctly points out that there is no reason why a default by one government should have an adverse effect on another government just because the two governments are using the same currency. And certainly Professor Salin is also right in observing that joint European responsibility for the debts incurred by individual European governments is not logically entailed by the existence of a common currency. And I think he is very much on target when he makes the further point that the crisis is being used by those with a political agenda of creating a more centralized European super-state despite the apparent opposition to such a state by most Europeans.
The “euro crisis” is a pure political construction. It is a splendid opportunity for many politicians to impose some of their longstanding goals on everyone else. For instance, before the introduction of the euro, many politicians who called themselves Europeans considered monetary union a stepping stone to political union. I was opposed to the euro before its creation, precisely because I feared that the currency’s stewards would take this arbitrary link between the monetary system and national policies as a pretense to further centralize political decisions.
Politicians now argue that “saving the euro” will require not only propping up Europe’s irresponsible governments, but also centralizing decision-making. This is now the dominant opinion of politicians in Europe, France in particular.
But despite those valid points, I am afraid that Salin misses the key point, simply ignoring the indefensible role that the European Central Bank has played in this awful mess. Salin argues as if the difficulties of European governments in repaying their debts were entirely the result of their own profligacy and bad management, though I would not suggest that the governments in question are entirely blameless. But he says not a word about stagnation in European nominal GDP growth, as if nominal GDP were determined independently of monetary policy. In fact, since the bottom of the downturn in the second quarter of 2009, nominal GDP in the Eurozone has grown at an annual rate of 2.3%, slowing to a rate of 0.84% from Q2 2011 to Q1 2012. Cyprus, Italy, Netherlands, Portugal, and Spain have all experienced contractions in NGDP in the last three quarters. That is an unconscionable performance.
The New York Times reported on Wednesday that the IMF is now warning of a sizable deflation risk in the Eurozone. Guess what? The deflation has already started. If it’s not showing up in the official price indices, that’s probably because of improperly constructed prices indices (perversely counting increases in VAT as price increases). The problem is not that some European countries won’t pay their debts; the problem is that a deflationary ECB monetary policy is preventing them from earning the income with which to pay their debts. Talk about blaming the victim.