July 4, 2012 · 0 Comments
Above: Mario Draghi
By Dean Baker:
The solution to the euro zone crisis is a topic that is hotly debated among economists. Some have argued that the debt troubled countries in the periphery must undergo years of austerity and high unemployment with the idea that this will eventually lower wages and prices enough to allow them to regain competitiveness with Germany and other countries in northern Europe. Other economists have maintained that the only practical solution is for the Germany and other northern European countries to have a period of moderately higher inflation (e.g. 4-5 percent) so that the peripheral countries could regain competitiveness by having very low inflation rates.
It is possible to find many people in both camps as well as some who have not made up their mind. However, in effort to clear up the confusion, a New York Times piece profiling Mario Draghi and his role at the ECB gave us the answer. The article told readers:
“The sweet spot Mr. Draghi must negotiate now is between the monetary hawks, especially in Germany, who say he has abused his power by going far beyond his inflation-fighting mandate, and the soft-money doves who say his failure is not going far enough to rescue the euro.
“Mr. Draghi in turn has urged politicians to do more, dismayed by the way they eased up on their reform drives once the flood of cheap loans to banks calmed markets for a few months. The lesson was that big injections of cash from the European Central Bank produce little more than a sugar high unless they are accompanied by fundamental reforms to the currency union’s architecture, changes that would convince investors that the euro zone is built for the long haul.”
Okay, so the NYT says the key is fundamental reforms. It might be helpful if the paper explained how it reached this conclusion and what evidence it has for its position. For example, are there any cases where countries have successfully pursued these “fundamental reforms” within a currency union to regain competitiveness? (Ireland, a one-time poster child for advocates of fundamental reforms, just saw its unemployment rate rise to 14.9 percent, a new high for the downturn.)
The sort of pronouncements about the best cure for the crisis are best left for the opinion section or expressed as statements from people involved in the debate. While the NYT’s reporters and editors are undoubtedly quite competent at their job, readers may not want to accept on faith their assertions about what needs to be done to end the debt crisis in Europe.