Thursday, July 16, 2015

Who Predicted the Eurozone Crisis?

According to a recent Bloomberg article, nine people saw the Eurozone crisis coming years before anyone else. Wow, only nine people saw it coming? That is remarkable, these folks must be truly prescient if only they foresaw the crisis. 

Except that this claim is terribly wrong. There were many economists who saw the problems of a European monetary union before it formed. One prominent economist not on the Bloomberg list is Martin Feldstein who wrote a famous 1997 Foreign Affairs article that began as follows;
Monnet was mistaken... If EMU does come into existence, as now seems increasingly likely, it will change the political character of Europe in ways that could lead to conflicts in Europe...What are the reasons for such conflicts? In the beginning there would be important disagreements among the EMU member countries about the goals and methods of monetary policy. These would be exacerbated whenever the business cycle raised unemployment in a particular country or group of countries. These economic disagreements could contribute to a more general distrust among the European nations.
Feldstein was one among many American economists who doubted a currency union in Europe would work. In fact, an entire article in Econ Journal Watch provides a survey of the skeptical tendencies of most American economists over the Euro prior to its inception. The authors, both Europeans, went on to claim these skeptical Americans had been proved wrong by history:
The main finding of our survey is that US academic economists were mostly skeptical of the single currency in the 1990s. By now, the euro has existed for more than a decade. The pessimistic forecasts and scenarios of the U.S. academic economists in the 1990s have not materialized. The euro is well established. It has not created political turmoil in Europe, and it has fostered integration of financial, labor and commodity markets within the euro area. Trade within the euro area has increased, and so has business cycle synchronization. Inflation differentials within the euro area are presently of the same order of magnitude as in the United States.
Why were U.S. economists so skeptical towards European monetary integration prior to the physical existence of the euro? 
Ironically, the article was published in early 2010 just as the Eurozone crisis was unfolding. For our purposes the most interesting thing about this article is not its incredibly wrong Euro triumphalism, but its documentation of the many American economists who were skeptical of the Euro. The article looks at American economists in the 1990s both at the Federal Reserve and in academia. Below is the list of academics covered in this paper. 



Add to this list another 43 surveyed from the Federal Reserve. So yes, there were a few more than nine people who expressed some level of doubt and worry about the viability of the Eurozone. So next time you hear someone touting the few who saw the Eurozone crisis coming, understand there were actually many who foresaw it.

Update: Presumably most of the UK residents who were against the Maastricht Treaty in 1992 did so because they understood the problems of a European currency union. After all, they had just gone through the Exchange Rate Mechanism crisis. So add these folks to the list of people who saw the Eurozone crisis coming.

18 comments:

  1. At least four of the nine listed are post-Keynesian / MMT types, aren't they?

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  2. Tom, the MMT people always say that being able to print your own money in an unconstrained manner is a panacea. So why is it surprising that they'd be against a currency union like this?

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    1. @Sam, you're right, it's not surprising, but what is surprising is that they comprise 4 of the 9 on Bloomberg's short list.

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    2. Tom, my point is that the Bloomberg list is ridiculously incomplete. It is a bad sample from which to draw conclusions.

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    3. It's a strange list indeed. There were more than a few notable skeptics. I'd add the following:

      Milton Friedman
      Nicholas Kaldor
      Barry Eichengreen
      Thomas Palley

      The MMT predictions don't impress me. Their theory seems to boil down to: "if you can print your own money then you can control the level of output and if you can't print your own money then you can't control the level of output. And if you aren't competitive and have to rely on the kindness of strangers for some reason then you don't fall under our "paradigm" because you aren't a "sovereign currency issuer" (whatever that means). Sounds like a load of doublespeak every time I encounter one of these people.

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    4. @Sam, they did have Friedman on the list.

      @Dave, I agree. Incomplete and even for such a short list, woefully unrepresentative as well (shouldn't Krugman be on that list for example?). At most one MMTer would have sufficed to represent that school of thought. However, I didn't get the impression that they were implying that was a list of the only important people who predicted trouble though. Did you get that implication?

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    5. Maybe the title of the article should have been "Bizarrely short and unrepresentative arbitrary list of people who saw the Greek crisis coming before everyone else did."

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    6. Tom, maybe the authors were a bit careless, but when you have an article with a triumphal title like they do it is hard not to think they are singling out these nine folks as being exceptional and "ahead of their time." I am glad, though, that you are taking the high road and given them a charitable interpretation. You are a gentleman!

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    7. What the MMT critics are missing is how far out on a limb the supporters of the theory went. They didn't just predict the flaws, they spelled them out in detail. And their models have now been proven correct.

      Oh, and a "sovereign currency issuer" is a government that as a fiat currency. The term is used to point out the mistakes the freshwater people make when they start comparing a household budget (currency users) with government (currency issuer). It means a government in control of its own printing press can never default.

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  3. Bernard Conolly was a Brussels Eurocrat in 1995 when he wrote "The Rotten Heart of Europe: The Dirty War for Europe's Money", and was fired from the European Commission for his trouble. In it he outlines the shortcoming of monetary union as it was envisaged/planned, and predicts the divisive and disastrous outcome of the Euro project. Its a highly entertaining read incidentally, and it took real courage to publish at the time

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    1. Two "n's": Bernard Connolly

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  4. A stop clock is also correct twice in 24 hours. The key difference between at least the four MMTers and most other forecasters is that theirs wasn't just some call that 'something' might go wrong, it was pinpointing exactly what would go wrong - being caught between a rock (i.e., no currency devaluation) and a hard place (i.e., no system of fiscal equalization). Sure, lots of folks present that today as a given, but not so much 10 or 20 years ago - if they had, they would be considered one of the founders of MMT - goes hat in hand.

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  5. Actually Tom if you really squint you see Krugman is on the list 1998(a). It's on the top on the right 11 names down.

    I have better eyesight than I realized!

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    1. Hi Mike. Yes, Krugman is on David's list, but he's not amongst the ones in the Bloomberg article. I'm not criticizing the list that David posted.

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  6. Salsabob, sorry but MMTers did not have the monopoly on pinpointing what would go wrong. Do you really think all the non-MMTers simply said "something might go wrong"? Do you really think all the literature on the OCA and its implications for the Eurozone was about some gut feeling that it might not work?

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  7. #It's not exactly predicitng the Eurozone crisis, but the basic problems have been known for years. AS a student in the 1960s I was brought up on the works of James Meade. His article on the balance of payments problems of a European Free Trade Area in the Economic Journal 1957 (!), set out most of the problems with what he calls there the integration approach to the problem. Though the context of the discussion is dominated by a world of limited convertibility the main problem seems to be the German surplus.. Plus ca change....

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  8. Martin Feldstein for The Economist, 1992:

    http://www.nber.org/feldstein/economistmf.pdf

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  9. John Pinder, "Economic Growth, Social Justice and Political Reform," in Richard Mayne (ed.), Europe Tomorrow: Sixteen Europeans Look Ahead (1972):

    "... the European Community appears to be moving towards a repetition of the old centralizing errors of the nation-states, by making economic policy instruments uniform over the whole area without considering whether this will allow the peripheral regions to be prosperous or not. For the thrust of the Community's development has been towards free trade, uniform agricultural prices, uniform tax systems and rates, and now a common currency, rather than towards common action to abolish poverty, unemployment, and regional depression. ... [A]mong the first casualties, if the new European economic system is constructed [along these lines], will be the regions outside the golden quadrangle [between Milan, Paris, the Midlands, and the Ruhr]. For they will find themselves bound to that golden Moloch by Community rules of fiscal and monetary uniformity; and this, because the Community's economy is bigger and its institutions still more remote than those of the existing nation-states, will make their predicament even worse than it is now."

    That's 1972, not 1992. This is from a book published to mark the entry of Britain, Ireland and Denmark to the EEC.

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