Thursday, July 5, 2012
What Euro Crisis?
July 5, 2012
What constitutes a crisis? Is it sustained economic decline, high and long-term unemployment, poverty, rampant inflation, a precipitous fall in the exchange rate, fiscal deficits, high borrowing costs, and political dysfunction? Most would agree that a crisis exists if just some of these “misery indices” are present. But, while Europe is widely perceived to be in the grip of crisis, only a handful of them are present, and in only a few eurozone countries.
So, why is there a eurozone crisis, and what defines it? Time and again, it is argued that the single currency does not fit the different needs of its member countries, and that unsustainable economic divergence will ultimately require that the euro be abandoned.
The fatal divergences that are most frequently cited include differences in growth rates, job-creation, and unemployment rates, as well as dramatic disparities in current-account balances, all of which may be traceable to wide deviations in unit labor costs. Perceptions of such divergences force considerable risk premiums on problem countries, inevitably resulting in accelerating capital flight to safe havens.