Friday, March 1, 2013

The Euro’s House Divided

by Jean Pisani-Ferry

Project Syndicate

March 1, 2013

The European Commission’s latest economic outlook paints a disheartening picture: unemployment rates close to or above 5% in Austria, Germany, and the Netherlands in 2014, but above 25% in Greece and Spain and roughly 15% in Ireland and Portugal. In the same year, per capita GDP is expected to be almost 7% above its pre-crisis level in Germany, but about 7% below in Ireland, Portugal, and Spain – and a terrifying 24% below in Greece. So the deep economic and social divide that has emerged within the eurozone is expected to persist.

Such a gulf within a monetary union cannot be sustained for very long. As Abraham Lincoln said, “a house divided against itself cannot stand.” The same monetary policy cannot possibly fit the needs of a country that is in depression and another that is at or close to full employment. Indeed, the single most important question for the future of the eurozone is whether the gap between prospering and struggling members is being closed.

The optimistic reading is that, despite no sign of improvement in the labor market, economic performance has in fact started to improve, and an adjustment process is under way. The proof, it is often argued, is that external deficits have contracted substantially.


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