

Paul Krugman: Can Europe Be Saved? - ssp
http://www.nytimes.com/2011/01/16/magazine/16Europe-t.html?pagewanted=1&_r=1&hp

======
BobbyH
Krugman's article seemed to be a relatively unbiased summary of an academic
area called Optimal Currency Area:
<http://en.wikipedia.org/wiki/Optimum_currency_area>

A "Currency Area" has benefits and drawbacks. The benefits are mostly
microeconomic in nature. For instance, if I can contract to buy something from
you in the future without having to hedge currency risk or change money,
that's a benefit.

The drawbacks are mostly macroeconomic in nature. For instance, Germany is
doing OK now while Greece is suffering. However, they share one currency (the
euro). If they had two currencies, Greece could devalue its currency, which
would boost its economy.

The drawbacks can be mitigated by things like labor mobility, e.g. Greeks
fleeing Greece to go to Germany where the economy is better. This happens in
the US all the time. However, Greeks and Germans don't share a language, so
this limits labor mobility.

Similarly, price/wage flexibility is important, but again, Europe does poorly
on this test because its unions and work rules.

Another way to mitigate currency area drawbacks is for the region to have a
"transfer union" that can use fiscal policy to spend more money in struggling
regions. However, Germans don't like the idea of giving money to profligate
Greeks who waste it (this is their view).

All in all, most economists don't think that Europe is an Optimal Currency
Area and that weak countries will be kicked out of the Eurozone.

------
bd_at_rivenhill
A couple of places where I disagree with Krugman:

 _...as the earlier Ireland-Nevada comparison shows, the United States works
as a currency union in large part precisely because it is also a transfer
union, in which states that haven’t gone bust support those that have._

I disagree strongly with his Ireland-Nevada comparison because the US Federal
government is currently bailing out homeowners and banks who got into trouble
as a result of Federal policy. The fact that the US housing bubble was most
severe in California, Florida, and Nevada has little to do with the state and
local government policies there and more to do with geography and migration
patterns related to demographics. In Europe, the Germans are basically being
asked to bail out governments who got into trouble as a result of malfeasance
or bad policy that had nothing to do with the German government. Until the
Feds start explicitly bailing out states like California or New Jersey (which
could certainly still happen), it seems to me as if they are really just
bailing out themselves.

 _Since these bonds (E-bonds) would be guaranteed by the European Union as a
whole, they would offer a way for troubled economies to avoid vicious circles
of falling confidence and rising borrowing costs._

They would also offer a way for these economies to take advantage of lower
interest rates to continue to act irresponsibly, which seems a likely scenario
given the history of this situation. Political institutions (and people) being
what they are, it seems like extreme amounts of pain is likely to be the only
effective tool to get them to actually move away from spendthrift policies.
The Euro would probably be in a better position if it came with an explicit
requirement that the bonds of member countries could not be purchased by the
Union itself or by other Union members, which might have reduced the appetite
for the bailout trade that major banks were so happy to engage in (although
such guarantees can certainly be circumvented, as the Argentine example
shows).

------
Roboprog
Only read the first page. But, it sounds like a better title would be "Can the
Euro Be Saved?"

------
paganel
Like always, mr. Krugman gets it wrong. Of course he blames the single
currency, when he should have blamed things like "rules governing worker
firing helped limit job loss, while strong social-welfare programs ensured
that even the jobless retained their health care and received a basic
income.". There's one thing that I've learned as a programmer, there's no
silver bullet, you can't have both "strong" social programmes and a dynamic
and versatile economy. You can't both stay at home doing nothing for most of
the day (look at the 35-hour week in France, for example) and still dream at a
life-style consisting of holidays abroad and 2 cars per family.

~~~
bryanlarsen
As opposed to the US where everybody over the age of 30 is afraid to quit
their jobs to start their own company because they'll lose their health
insurance? And I see lots more Americans staying at home getting fat in front
of the TV than I do Europeans.

\- 5 extra hours a week and 4 extra weeks of vacation a year just give you
more time to work on your side projects to get out of that corporate job
quicker.

\- in some countries, unemployment insurance provide resources to help you
start your own company

\- "overseas vacations" are a lot cheaper cause you can buy a plane or train
ticket for 50 euros to get to the Mediterranean

\- Nobody wants two cars because they provide more hassle than benefit in an
area where everything is close by and available via public transit that's
clean, convenient and used by everybody, not just the poor.

\- but most importantly, if you fail, you know that your kids won't starve and
that your own retirement will be comfortable. As everybody knows, fear of
failure is the biggest impediment to starting your own company.

\- in return, you pay 10% higher taxes, which you don't miss one bit once you
make that first million.

The biggest reason the US is more entrepreneurial is purely cultural. In
France, one of the biggest aspirations is to go to Polytechique and become a
bureaucrat. In the US, that's for lazy people who want a secure job. So France
has a much better bureaucracy and a much worse entrepreneurial scene.

~~~
InclinedPlane
Afraid? Perhaps. But even so the American job market and economy is far more
dynamic. A lot of people over 30 do quit their jobs and start their own
companies.

~~~
bryanlarsen
And so do a lot of Danes.

As I said, the reasons are primarily cultural. Some things in Denmark make it
easier, some things make it worse. Culture is why YCombinator is in the bay
area, even though higher taxes and high prices make it one of the worst areas
in America to start a company if you exclude cultural factors.

~~~
wlievens
This is very much true. I live in a country with a high living standard,
comfortable work arrangements and many (government-sponsored even) options for
taking time off.

Yet we have one of the lowest startup rates in Europe (not just in tech).

It's _definitely_ a culture thing.

------
macco
I really take a bow. This article show why this man has won Nobel Prize. It is
really tough to explain such a complicated problem with so easy to digest
words.

BTW I am German.

