White House Chronicle

News Analysis With a Sense of Humor

Euro Shows One Size Doesn’t Fit All

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When do two diametrically opposed economists, one from the left and one from the right, agree?

Answer: When the subject of the euro comes up.

So it is that Paul Krugman of Princeton and The New York Times and Irwin Stelzer of the Hudson Institute and News Corp. both attacked the euro in the past week. They blamed the euro for the difficulty in bringing meaningful help to the troubled euro zone economies of Europe. And they were right.

Stelzer and other conservative economists had warned of the weakness of the one-size-fits-all nature of the common European currency at the time of its launch in 1999. Liberal economists, more sympathetic to the political dimension of the euro, were prepared to be satisfied with the assurances of fiscal probity from the aspirants to the new currency and endorsed it.

If everyone played by the rules and kept an orderly financial house, the euro would survive its structural weakness, reasoned the fathers of European monetary union. And for 11 years, it appeared that they were right.

The new currency found a lot of favor and hardened against the dollar early on. In some ways the euro was thought to be on its way to being a new reserve currency, supplanting the dollar. Iran and other oil producers with no love for the United States talked about designating the world oil trade in the euro rather than the dollar.

Now disaster, or near disaster. The weakness of a multi-country currency is revealed for all to see.

If Greece, Ireland, Spain, etc. still had their own currencies—the drachma, the punt and the peso—they would be able to deal with their financial crisis by devaluing their currencies, or by letting the markets do it for them. That would make their exports cheaper and their imports more expensive and leave the holders of their bonds intact, if a little poorer.

Likewise when the Irish currency was overheating during the property boom, interest rates could have been raised to cool things off. With a single currency there is no such flexibility, and each country must struggle with draconian internal economic measures that may take years to have an effect.

Why then did most countries of Europe, including this one, jump into a single currency when the potential for problems was known? Call it “The European Dream.”

I am writing this from Bratislava, capital of Slovakia. Here on the Great Hungarian Plain, where armies have crossed and recrossed for thousands of years, from the Romans to Napoleon, to Hitler to Russians, who put down the Hungarian uprising of 1956 and the Prague Spring of 1968, it is easy to understand the evocation, “Never again.”

The first and definitive purpose of integration was to end internecine war in Europe, its curse for more than 2,000 years.

Yet from its inception as a customs union in the 1950s to the 27-nation behemoth it is today, integration has come slowly. People have different cultures, speak different languages and still have not found a common European persona.

Aspiring young politicians still head to their national assemblies rather than the European Parliament, and most people still have difficulty in accepting the dictates of the bureaucrats in Brussels.

So, to the European idealists, a common currency seemed something that would further bind Europe together. Now it appears to be something to be hated rather than embraced.

Yet no country in the common currency can afford to pull out in the current crisis. Krugman rightly points out that this would lead to a run on the banks, ahead of the devaluation that would certainly occur if any troubled country sought to revert to its old currency.

What is missing in the halls of economic philosophy is a way to make a single currency work equally for the weak and the strong. In the present crisis—and it is a severe one—that would be for strong Germany, France and Italy and for weak Greece, Ireland, Spain and Portugal to weather the current storm.

One size has yet to fit all. But one size is what the euro zone has to work with.

 

 

We Ask More of Government, but Say We Want Less

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Ready for a little heresy? Here goes: The government we have is about the right size, or a little small, for what it is asked to do.

I call as my first witness the humble banana. In a few short years the Cavendish banana, the variety which we know and love (about 100 billion are consumed annually worldwide), may fail as a crop throughout the banana-producing regions of the world.

That is because Cavendish bananas, which have no useful seeds and are cultivated from clippings, have been infected with the strain of a fungus that nearly wiped out the world’s former top banana, the Gros Michel, or Big Mike, in the 1960s.

But worry not. Somewhere in the sprawling Department of Agriculture, scientists are working to save the American breakfast fruit, at least I hope so.

I call my second witness: the Burmese Python. This invasive rascal – a constrictor that can crush and swallow an alligator – is perpetrating the animal equivalent of genocide in the Florida Everglades. I hope there is a federal program to contain this constrictor before it overcomes its aversion to cold winters or, as the climate continues to warm, it comes sailing up the Potomac River at 6 miles per hour.

The same hope extends to saving honeybees, without which all plant life (except bananas and other clones) will perish. We also need to save the dwindling bat population, to stop the Asian carp from swimming up the Mississippi River and threatening the Great Lakes. And we need federal sleuths to track down the salmonella infection in eggs and punish the farmers who produced them.

We expect the federal government to be omnipotent and omnipresent. We were shattered to learn, for example, that the Feds had no way of sealing the runaway oil well in the Gulf of Mexico. We also want the government to have limitless compassion for the flood victims in Pakistan and the hurricane survivors in Haiti.

These are just some of the small-scale problems, not the big ones of war and peace, of welfare and Obamacare. But they are among a myriad of things we want done by our government. Now. Fast.

Recently I have become interested in so-called orphan diseases. These are the cripplers and killers that have no powerful lobbies fighting for federal research dollars, and have failed to excite the pharmaceutical industry because there is unlikely to be a cure in a pill. Desperately, those who suffer from these diseases call on the government to do the research and find a cure.

But here is another problem: not enough competition in the government. While the National Institutes of Health is criticized for picking winners and losers for research dollars, it is the only game in town. The solution would be a competing institution.

In the world of energy and nuclear weaponry, there are many competing government laboratories, including the three large federal weapons labs: Los Alamos, Sandia and Lawrence Livermore. They compete, they overlap, sometimes they duplicate, but they provide a kind of defense in depth against scientific favoritism.

Pluralism and diversity have a place in government, even if the critics cry “waste.”

Some years ago at an Aspen Institute meeting, the economist Irwin Stelzer, a passionate free-marketer, clashed with James Schlesinger, an economist, historian and former chairman of the Atomic Energy Commission, director of the Central Intelligence Agency, secretary of defense and secretary of energy. Stelzer’s argument was that the private sector was better and more efficient at research.

Brilliant as Stelzer is (I have known both men for about 40 years), that round went to Schlesinger who listed effortlessly more than a dozen government-funded inventions, from the Internet to the aero-derivative gas turbine. He made the case for government sufficiently well-funded to do the job.

My case is less sophisticated. We keep asking more of government even while we say we want less.

Even the government has not been able to invent a plausible free lunch. So, pay up.