The Euro in Retrospect

Crappy pro-EU propaganda!

I will not let an aside be an aside. Paul Krugman writes:

As an aside, the interesting thing about the euro from a political point of view is the way it cut across the ideological spectrum. It was hailed by the Wall Street Journal crowd, who saw it as a sort of milestone on the way back to gold, and by many on the British left, who saw it as a way to create an alliance of social democracies. It was criticized by Thatcherites, who wanted to be free to move Britain in an American direction, and by American liberals, who believed in the importance of discretionary monetary and fiscal policy.

Krugman is right that thought on the euro did not follow ideological alignment. But I think his own position as an American liberal who was critical of the idea shades his vision. The view that he attributes to “many on the British left,” that the eurozone would be an alliance of social democracies, was widespread internationally among leftish types. So was the sympathetic view of the euro as an implicit challenge to the political and military dominance of the United States. That is how I saw it at the time, at least, and when I lived in France it seemed to be a common view among French people. Because the most visible opponents of the euro were nationalist xenophobes on the right, tribal instincts made many of us feel we must belong in the other camp. Krugman’s view was that a eurozone with a continent-wide monetary policy would not be able to deal with downturns that affected some countries but not others, given that Europe’s economy was not integrated enough that workers could move in large numbers from recessionary countries to prosperous one. Krugman was studying Japan’s economic woes at the time, and so was acutely aware that serious recessions could still occur in modern, developed countries. Krugman’s critique has proven to be prescient, to say the least. But most of us back then thought Japan’s problems were due to unusual features of the Japanese economy (declining population, unwillingness to allow immigration, &c) and that central bankers in the west had figured everything out. There would never be a serious recession, we thought, so it didn’t matter. That was the crazy idea that prevailed in the late 90s, just as it prevailed in the 20s. Whoops.

The fundamental idea behind the European Common Market, which expanded to become the European Union, was to create common interests between the European powers that would prevent further conflict between them. It is paradoxical that now, half a century later, the institution that resulted is causing more turmoil in Europe than it has seen in decades. The proud workings of rationality stand once again humbled.

UPDATE: I’ve edited the post to make it more precise. The first draft needlessly brought Krugman’s writings on the liquidity trap into the mix. In fact his case against the euro was stronger than I originally implied, since it doesn’t rely on that special case. (I think that if Krugman were to restate his argument now, he would probably emphasize the lack of continent-wide fiscal policy capable of making transfer payments to workers in recession-affected countries, since it’s unrealistic to assume that increased labor mobility would actually fix unemployment problems).