A Weak Foundation for a Stable Euro

A Weak Foundation for a Stable Euro

The great and good of Europe have been obsessing over a revived and strengthened stability pact for the euro — that is, tougher constraints on budget deficits.

Following months of heated debate over whether countries in the euro zone that fail to reduce their debt levels adequately should be punished, German Chancellor Angela Merkel and French President Nicolas Sarkozy finally reached a deal on putting in place automatic sanctions, in order to avert future Greek-style debt crises.

Their agreement basically empowers certain politicians to block such sanctions.

Wolfgang Munchau, a columnist at the Financial Times, marvels at Europe’s latest obsession in an Oct. 24 commentary piece. “The real irony is that the pact, in whatever form, is not even relevant to the euro zone’s future,” he writes. “This may be a shocking statement. But look at the evidence. Contrary to popular narrative, fiscal profligacy played only a minor role in the euro zone’s sovereign debt crisis. Successive Greek governments cheated, but on my information, this occurred with at least partial knowledge of the senior European officials involved in the process. They chose not to apply the pact for political reasons.”

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“As for Spain and Ireland, they did not breach the rules ever, and would thus never have been subject to sanctions, automatic or otherwise.”

What Mr. Munchau doesn’t say, but I suspect he understands, is that this is in large part a case of the boy with a hammer, for whom everything is a nail.

Bankers and economists love, just love, being fiscal scolds.

Deficits are something they understand, plus denouncing deficits makes these experts sound moral and responsible. According to this narrative, everyone was reckless, and there is only one fix.

So rather than considering the complexities of our current economic problems — such as the need to rein in shadow banking — many of these people would really much rather lecture governments on the evils of red ink.

Earlier this year, it was very obvious from where I sit that these Very Serious People were in some ways overjoyed at the Greek debt crisis.

At last, here was their kind of issue. Here was a debt-saddled nation forced to make deep budget cuts in its struggle to stop interest rates from rising. And after the furor over Greece had died down, they wanted to Hellenize everything in sight.

The failure of interest rates in the United States to spike has caused much private disappointment for such people.

So Europeans are obsessing over a stability pact? Well, it’s a whole lot more pleasant than figuring out how to make the euro work.

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Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed page and continues as a professor of economics and international affairs at Princeton University. He was awarded the Nobel in economic science in 2008.

Mr Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes, including “The Return of Depression Economics” (2008) and “The Conscience of a Liberal” (2007).

Copyright 2010 The New York Times Company.