Former U.S. Secretary of the Treasury Timothy F. Geithner and Professor Andrew Metrick survey the causes, events, policy responses, and aftermath of the recent global financial crisis.
The Economics of the Euro
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Del curso dictado por Yale University
The Global Financial Crisis
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Conoce a los instructores
Andrew MetrickMichael H. Jordan Professor of Finance and Management
Yale School of Management
Timothy GeithnerLecturer in Management, Yale SOM, Former U.S. Secretary of the Treasury
Yale School of Management
[MUSIC]
So why have the after-effects of the global financial crisis been so
much worse in the Eurozone than in the United States?
In the United States while the recovery was somewhat slow,
there was no double dip recession and within several years,
unemployment had gone back down very close to pre-crisis levels.
In the Eurozone, we're nowhere near achieving that, why?
There's one mean central reason, and that reason is that the Eurozone
is not what economists call an optimal currency area.
We have more than one currency in the world.
Nobody thinks, or at least nobody who studies this issue carefully thinks
that we should have only one currency in the world.
It's useful to have multiple currencies.
It's useful to have multiple currencies because if you have a shock
that hits one particular place,
it's good to be able to have monetary policy that can react to that shock.
That's the advantage of having your own currency, if you are a country.
Is that, if something happens and you need to have a looser policy, you can do it.
Of course, the disadvantage of having your own currency,
is that it creates additional transactions costs with other countries,
people need to exchange in and out of your currency.
Creates a certain amount of uncertainty, because when someone invests in a country
with their own currency, they don't know what will happen to that currency and
that's a risk that they have to deal with in their investment.
And it also runs the risk that a country may not manage its monetary policy well.
It was those downsides that led many of the countries, in what is now
the Eurozone, to decide that they would be better off with a single currency.
It was also a bit of a political and a social experiment set by a whole
series of goals to tie the countries of the Eurozone closer together with
their single currency and the increase in trade that they would then receive.
It was understood by many people about that time
in 1992 when the treaty was signed that there might be some challenges.
And the challenges are that in the absence of countries having their own monetary
policy, the adjustment process to some shock, requires that other things move.
Labor needs to move or money needs to move from one part of the system to another.
Or you need to have wage or price reductions or deflation.
These things are easier to do in some places than others.
Let's compare and contrast what would happen for example, with the shock in
the United States as compared to a shock that would happen in the Eurozone.
I'm in Connecticut, if in Connecticut,
we get a very bad economic shock, there are automatic stabilizers
in the federal system in the United States that enable us to recover from that shock.
The citizens of other states all pay taxes to the federal government and
the federal government makes transfers to unemployed people in Connecticut.
If Connecticut all of a sudden had the most unemployed people in the country,
Connecticut would automatically get the most assistance from Washington.
There's no vote and there's no way for
citizens of other states to pull back on that in the short term.
Similarly, while there are cultural differences in the United States,
there are many people in Connecticut with roots and friends and
family in other states of the United States.
And who were able to move if there were a shock here from Connecticut to other
parts of the United States without it being an enormous problem for them.
Compare that to what goes on in Europe.
When there is a shock that happens to Greece or to Portugal, while it
is legally possible for people from Greece and Portugal to move to Germany or
to France and many have, there are cultural differences,
linguistic differences, religious differences in many cases.
And just the lack of having roots in those countries that make that movement more
difficult.
So if you were unemployed in Greece or in Portugal, it is not so
simple for you to go and to find a job in Germany.
Not as simple as it would be for someone from Connecticut, for
example, to move to California.
In addition to reduced labor mobility,
there is a lack of fiscal federalism in Europe that is
nowhere near the level of where we currently have it in the United States.
So as it would be for the unemployment insurance in the United States,
if people all lost their jobs in Connecticut,
there would be automatically money flowing from the citizens of other states.
That doesn't happen in Greece.
Rather, when Greece has enormous problems, there's no direct transfer that will
happen from countries like Germany and France that are doing better.
Instead, there's a need to go back to the citizens of those countries and
ask for what sounds like a bail out.
Where in reality what we often have at least in part
are the after effects of a shock.
The lack of this fiscal adjustment, automatic fiscal transfers, or
easy labor mobility means that Eurozone countries faced with this shock,
not having their own monetary policy,
are left to rely on the last two things on this list.
That is, nominal wage and price reductions or deflation.
This type of deflation also called an internal price adjustment.
So rather than adjusting your prices all at once by having your
currency depreciate, which automatically means that your prices are now going
to be lower relative to everybody else who doesn't have your currency.
And you do it in one fell swoop.
Rather than being able to do that,
you have to effectively go business to business and individual to individual
recognize the problems in the market and reduce prices and reduce wages.
This creates an additional challenge for any economy that is heavily indebted.
If my mortgage and my debts are in one currency and
those are fixed and you reduce my earnings
in that same currency, then my debt seems even bigger than it was before.
This is a debt overhang problem that is exacerbated by any kind of deflation.
We often worry about inflation.
Inflation is normal to us,
we've seen it in many different economies at many different times.
Deflation is a very rare thing to happen under a non-metallic
currency such as we have had since the 1930's.
But deflation is extremely painful.
And when it does occur, it means that people who have debts who
find their wages falling, see those debts as being even greater.
And anybody considering an investment has to understand that the dollar that they
actually have today, they're gonna need to earn an even
higher return on it going forward than they otherwise would.
This problem, this challenge of a deflationary environment when there's
a large amount of debt, being the only way that you can actually have an adjustment
after a shock, in one region is the reason that the European union or the Eurozone,
what is now the Eurozone area, is not a place that you would initially look at and
think they should have only one currency.
That's a structural weakness that's been in place since 1992.
It was effectively a bet on the part of the framers of the Eurozone,
that they would be able to achieve a level of cultural unity and
of fiscal unity that would take place before they got hit by a large
enough shock that could break the entire union apart.
That bet wasn't necessarily a terrible bet if you factor in all of the political and
social reasons why such a union would be valuable.
But the fact of the matter is that that bet did not payoff and
in the end the shock came before the union came.
And we're now facing the effects of that shock.
[MUSIC]
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