Self-Congratulation Must Not Blind Policymakers to Eurozone Weaknesses
Letter to the Editor

Desmond Lachman responds to Ralph Atkins's December 31 article in the Financial Times.

Resident Fellow
Desmond Lachman
Ralph Atkins is overly sanguine about the euro's future. At a time when the eurozone is being severely tested by its worst economic recession in the post-war period, he confidently asserts that the euro is in good shape. And at a time when Europe's eastern periphery is in the midst of a currency crisis that will highly complicate its attainment of the Maastricht criteria anytime soon, he bravely predicts that faster expansion of the eurozone is very much in prospect.

In extolling the Eurozone's many achievements, Mr Atkins glosses over the serious imbalances that have developed within the eurozone that could prove to be the euro's eventual undoing. Among the more fundamental of these imbalances are the marked divergences between eurozone members in international competitiveness and in external current account positions.

Greece, Portugal and Spain all now have external current account deficits of between 10 and 12 percentage points of their respective gross domestic product as a result of a substantial loss in price and cost competitiveness. History all too sadly attests to the fact that external current account deficits of this size are simply not sustainable. History also suggests that correction of these deficits within the constraints of a currency union will entail prolonged periods of sub-par economic performance that could be politically difficult to sustain.

Further threatening the euro's longer-run durability are the ongoing bursting of outsized housing market bubbles in Spain and Ireland, as well as the lack of serious progress in addressing fiscal imbalances and excessive public indebtedness in Greece and Italy. In the midst of a global recession, these problems will prove very difficult to address without an independent monetary and exchange rate policy.

One must hope that the self-congratulation to be expected on the occasion of the euro's 10th birthday celebrations does not blind European policymakers to the existential challenges that the recession now poses for the euro. One must also hope that recognition of these challenges galvanises European policymakers to be more aggressive in their fiscal and monetary policy response to the present recession than has been the case to date.

Desmond Lachman is a resident fellow at AEI.

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