Two recent articles on the euro crisis that I’ve been meaning to blog. First, “Daniel Kelemen”:http://fas-polisci.rutgers.edu/dkelemen/index.html argues that neither the euro nor the euro’s difficulties are “likely to disappear”:http://www.foreignaffairs.com/articles/137642/r-daniel-kelemen/europes-new-normal? anytime soon:
bq. With both breakup and immediate solutions off the table, then, the eurozone is settling into a new normal. As the union slowly digs itself out of the economic pit, it is important to recognize that its system of economic governance has already been fundamentally transformed over the past two years. First, the eurozone has, at least in practice, done away with its founding documents. …The Maastricht governance regime is dead. The SGP was never strictly enforced, and when the crisis hit, the European Union tossed aside the no-bailout clause. … the European Central Bank — legally prohibited from purchasing any member state’s debt — has thrown its rules aside and directly purchased billions in Greek, Irish, Italian, Portuguese, and Spanish bonds … Moving forward, austerity, wage reductions, and structural reform on the periphery must be coupled with public spending and wage increases in Germany, which will boost demand. There will be no quick fix, but the eurozone will recover, slowly but surely.
Second, “Layna Mosley”:http://www.unc.edu/~lmosley/ argues that bond markets’ reactions “are more complicated”:http://www.foreignaffairs.com/articles/137711/layna-mosley/dont-sweat-the-bond-markets?page=show than many observers understand.
bq. the last few years have also contained subtle lessons about the relationship between governments and capital markets. More specifically, they have shown that our understanding of the pressures that private capital markets place on governments is incomplete. Although holders of government debt certainly would react markedly to a change in the membership of the eurozone, they would not likely react strongly, or over the longer term, to many other government policy decisions and political outcomes. And these reactions have varying consequences for governments, depending on how governments have managed their debt profiles. Were the move toward eurobonds to come to fruition, some of these debt management decisions presumably would be made by EU-level, rather than national, authorities. … Moreover, as long as market actors continue to focus on the big picture, investors will respond more to overall outcomes, such as whether or not budget deficits can be slashed, than to specific policy decisions. This isn’t to say that overall outcomes are easy to achieve politically or economically, but policymakers would do well to worry less about capital market reactions to specific measures. Instead, they should worry about reassuring or protecting particularly hard-hit, or politically vocal, domestic groups, as well as about appropriate management of public debt profiles. And, to return to the example of France, capital markets do not necessarily hate left-leaning governments: in this era of uncertainty, markets may care less about the socialist label and more about whether Hollande is able to build a coalition (at home as well as in Europe) to move forward on economic policy.