Edgy Europe Wonders: Who Will Be Next?

I’ve recently been reading online posts by Kevin O’Rourke, watching with astonishment and admiration as the mild-mannered economic historian has become Isaiah, righteously denouncing what has been passing for responsible policy in Ireland — namely, the reparations imposed on an innocent public.

But Mr. O’Rourke, an economics professor at Trinity College Dublin, also produced a beautifully written, heartfelt piece on the nation’s woes that was published on Eurointelligence, a commentary website. Read it and weep.

An excerpt: “It is one thing to know that someone you love is terminally ill; their death still comes as a shock. I certainly don’t want to compare the arrival of the E.U.-I.M.F. team in Dublin last week to a bereavement. But I was surprised at how upsetting I found it, given that it came as no surprise. … But to know something is one thing; to see it actually happen is something entirely different.”

Folks, the situation in Europe is getting more serious.

Following on Ireland’s financial troubles, recent concerns about Spain’s possibly having to seek financial aid are bad enough.

And, with near record-high borrowing costs, all eyes seem to be on Italy.

Italy has puzzled me a bit.

On one hand, it has a lot of debt (roughly 118 percent of gross domestic product), and if you look at its prices and wages, it looks almost as overvalued as Spain.

On the other hand, Italy’s deficit is not nearly as bad (5.1 percent of G.D.P. in 2010), and the economy doesn’t seem to be suffering as much as one would expect.

Now Italy finds itself under pressure. “Italy has become a concern because the economy is not growing fast enough to keep up with the public debt,” Giacomo Vaciago, a professor of political economy at the Catholic University of Milan, recently told The New York Times.

Nevertheless, I still don’t see a wide euro breakup happening. A rump euro zone, without the southern Europeans, doesn’t look workable to me. Why? It’s not about economics per se — it’s about political economy.

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One thing that’s really essential for the euro to work as a political matter is for Germany, the largest economy in Europe, not to be too dominant. Look at the United States. There cannot really be a North American Monetary Union because the United States would be too dominant: either it’s just an American monetary hegemony, or the United States takes an unacceptable loss of sovereignty to other minor partners.

Europe, by contrast, has four-and-a-half large economies.

Britain chose not to join the euro zone, but that still left France, Italy and Spain to share the running of the federation with Germany.

But France, Germany and a few Flemings and Walloons doesn’t make for an equal partnership.

Backstory: A Volatile Euro

The euro has had a bumpy ride recently.

In the first days of December, the euro fell against the dollar to lows not seen since mid-September, as yields on the government bonds of troubled euro zone nations, such as Italy and Belgium, spiked to historically high levels and the European Central Bank indicated that it would not raise interest rates.

On Dec. 2, Jean-Claude Trichet, the bank’s president, quickly affirmed the E.C.B.’s determination to do whatever it takes to resolve the euro zone’s financial crisis.

Dealers also disclosed the same day that the E.C.B. had begun buying government bonds from Ireland, Greece and Portugal. Following this news, the euro bounced to a weekly high, yields on government debt began to drop and European stocks rose about 2 percent.

But investors still apparently harbor concerns that Ireland’s financial crisis might spread to economies on the periphery of the euro zone.

Beyond Portugal and Spain — which could be the next dominoes to fall and may need financial help — some experts are now worried about how Italy and Belgium might fare if the crisis spreads. At the end of the first week of December, borrowing costs on both Italian and Belgian debt climbed to near-record highs.

Also, political tempests in these nations could affect their governments’ handling of a debt emergency.

In Italy, the government of Prime Minister Silvio Berlusconi is facing a loss of public confidence as allegations that he has committed sexual improprieties dominate political debates in that nation.

And Belgium is still working to put a governing coalition in place after Flanders, a prosperous, Dutch-speaking region of the country, voted to separate from the French-speaking Wallonia region last June.

© 2010 The New York Times Company

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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.