Kevin O´Rourke about the Black February Turmoil on the Eurozone
“The lack of a federal government was one reason why many economists were sceptical about the Euro in the 1990s. At the time, they were ignored on the basis that the Euro is a political project. Very well: let the politicians lead that project to its logical conclusion.”
FAST INTERVIEW by Jorge Nascimento Rodrigues
Q: Do you think the Eurozone is suffering a severe speculative attack, particularly from hedge funds, as the EMU in the 1990s?
A: There is clearly speculation going on, and the speculators should be faced down. However, politicians should not use this as an excuse to avoid confronting the underlying causes of the crisis. There is a real problem in Greece, whose official statistics have been discredited. And there is a real problem in the eurozone, where the lack of a strong fiscal centre is leading to pressure on peripheral economies to deflate at the worst possible time. By contrast, in the United States the fact that the federal government spends a large chunk of US GDP means that net transfers are automatically made to regions in particular trouble, as a result of federal taxation and expenditure policies. The lack of a federal government was one reason why many economists were sceptical about the Euro in the 1990s. At the time, they were ignored on the basis that the Euro is a political project. Very well: let the politicians lead that project to its logical conclusion.
Q: The high fiscal deficits and sovereign debts are a real time bomb inside the Euro Zone?
A: Let’s focus on the real problem here. Unemployment is a time bomb in places like Spain. Excessive focus on deficits risks making this problem worse. If one little country like Ireland cuts expenditure right now, this will not make much difference. But if the entire periphery, including Spain and Italy, starts cutting then that is very dangerous.
Q: Do you think the best solution is the IMF intervention in the most risky country cases, or the European Union must take care of the problem, eventually with the observation model regarding Greece as a standard for the future and the launch of a Eurobonds initiative?
A: In a first best world I would favor a European solution, which would involve a bold step towards fiscal federalism. Thursday’s (Feb. 11, 2010, in Brussels) summit ought to send a strong message to markets that under no circumstances will any member state be left high and dry in the event of a market panic. If the market does panic, and Europe’s leaders do nothing, then of course the IMF should be brought in. If that happens, perhaps that will serve as a wake-up call to Europe’s vain and ineffective political elite.
Kevin O’Rourke is Professor of Economics at Trinity College Dublin, a co-organiser of the CEPR’s Economic History Initative and a Research Fellow of the National Bureau of Economic Research. He received his PhD from Harvard in 1989, and has taught at Columbia University, UCD, Harvard, and Sciences Po (Paris). He is currently serving as President of the European Historical Economics Society, and an Editorial Board member of World Politics. He contributes regularly to the Irish Economy blog and Vox.