Wednesday, July 27, 2011

Recent European Economic Developments Are Probably Related to the Euro

. Wednesday, July 27, 2011


Some people commenting here seem puzzled by what I write about Europe. How can I write favorable things about the performance of European welfare states, then turn around and write negative things about European monetary policy and developments?

Ahem. These are different questions. I can say that Mr. X is a fine musician and a lousy tennis player; I can praise his taste in music and despise his taste in food. Europe has a lot to teach us about health care and the virtues of a strong safety net; but the single currency project was ill-conceived and is going badly. In fact, at the moment it is going very, very badly.

A few days ago he posted the above graph and wrote:

I’ve written a number of times about the weird way American perceptions of Europe seem stuck in the past. It’s common — especially on the right, but more broadly too — to see Europe as a land of stagnant economies and lack of jobs. This vision had some truth in the 1990s, but was becoming less and less true even before the crisis, which hit US employment much harder than European employment.

The graph clearly shows convergence has come along two tracks: the weakening US labor market and the strengthening European labor market. As Krugman says, this has happened since the 1990s. So what have been the two biggest events in the US and Europe since the 1990s? The Lesser Depression in the US, and... the introduction of the euro in the EU in 1999.

In other words, these might not be two different questions analogous to taste in music and taste in food if the improved European employment picture is related to the adoption of the euro. The two are certainly correlated. And if we were to ask ourselves why European employment has improved over the past decade, wouldn't the single biggest policy change over that period be at the top of the list of potential explanations?*

This could also help explain why the EU is fighting so hard to keep the eurozone intact, despite increasing domestic political pressure in both creditor and debtor countries. The last decade was very good for both the Eurocore and Europeriphery. Some of that prosperity was predicated on a lie, as Krugman rightly notes, but not all of it.

*Other contenders could be neoliberalish reforms made in many European countries, some related to euro-adoption and some perhaps not, in an effort to boost competitiveness and economic growth in the EU. These include privatizations, deregulations, and a weakening of some of the welfare state. I doubt Krugman would favor those explanations either, but I'm not sure what is left.


Benjamin Thomas Sutpen said...

Your selling short increased integration here. It's not just the €, far from it. Economically the EU has integrated in a very significant way since the SEA and then of course Maastricht also.

Benjamin Thomas Sutpen said...

And as life often goes I just randomly found a (German) article discussing how the € did not impact employment in the Eurozone:

Kindred Winecoff said...

Benjamin -

Again, I'd expect that the euro has increased integration. The point of the euro was to reduce transaction costs, reduce uncertainty, and increase efficiency. All of those are related to integration.

I had to rely on Google Translate to read that article, but the argument makes sense. I think there's a problem using D-i-D with non-EMU OECD countries as the control group, but I'll trust that the results are robust. As I read the translation, the authors conclude that it's not even clear that there has been a trend towards lower unemployment over the period they examine (1984-2008). But it's worded weird so I can't be sure I'm reading it right.

If that's the case, then the premise of this post is wrong. If that's not the case, then we have a puzzle in need of explanation. Any ideas?

Recent European Economic Developments Are Probably Related to the Euro
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