The former chairman of the US Federal Reserve, Ben Bernanke, is reinventing himself as a blogger. In his most recent posting he makes several telling points about the mess the euro zone finds itself in.
He reminds us that, as recently as 2010, unemployment in the US and the single currency area was the same. Today, the US rate is half that of its European counterpart. He attributes this dismal euro jobs experience to serial policy failures. The fact European unemployment is so heavily concentrated among young people will result in deskilling that will act as a drag on growth prospects for years to come.
The uneven nature of the unemployment problem reveals an even worse picture: the jobless rate excluding Germany is close to 14 per cent. This, along with several other key economic indicators, speaks to a seriously unbalanced European economy. As Bernanke says, the euro area was supposed to foster prosperity. It appears to be doing so mostly only in Germany, where unemployment is less than 5 per cent. Even so-called core countries like Finland and the Netherlands are doing poorly. France is stuck in an ultra-low-growth rut, while Italy is a serious no-growth concern.
Europe's answer speaks only of the need for structural reform. If a country finds itself in a bailout, those reforms are mandated by the lenders. Bailout or not, the only economic policies allowed by the new European orthodoxy have to be "structural". Such a policy prescription ignores the very different experiences of the US and Europe over the last five years. Something else could have been done. Structural reforms speak only to the long term. Europe has absolutely nothing to say about policy disasters of the last five years.
Bernanke points to the European Central Bank. Monetary stimulus was slow in coming: this was politically driven and a mistake. Another error was tightening fiscal policy in countries with no need to do so. Germany is the biggest culprit. Politics gave rise to the wrong policies.
Germany is free to make these political choices and live with the economic consequences. But the existence of the euro means we have to live with them too. One normal effect has been absent: Germanic fiscal and monetary policies would have led, in the past, to a stronger deutschemark. The euro has, by contrast, been weak, giving a boost to already ultra-competitive German exports. Germany has a balance of payments surplus of 7.5 per cent of gross domestic product. Anywhere else this would be seen as a sign of serious structural imbalance.
Germany has been able to generate full employment via its trading sector and has not had to expand its domestic economy: it has only been able to do this because of the euro. With its own currency, Germany would have needed more consumption and investment to achieve full employment. All the burden of adjustment for imbalances falls to other countries. They have had to deflate. This is as asymmetric as it is unfair and unsustainable.
Structural reform
Structural reform should cut both ways. Germany should introduce structural changes to its domestic economy so it too grows at a healthy pace. But, given the prevailing orthodoxy, that is never going to happen. The European economy is doomed to remain seriously imbalanced. Bernanke suggests a change to the stability and growth pact such that trade imbalances are treated as as big a problem as fiscal deficits. That’s not going to happen.
The euro is clearly working for Germany. It is hard to make that claim for many other countries. There are many in Germany that reject this: is it not reasonable to argue what works for one country will work for all? The answer is no, with evidence all around us to prove it. Bernanke is not the first to say this. But nobody else carries his authority. The extraordinary thing is nobody in charge in Europe will pay him the slightest attention.
