European End Game: The Striking Similarity between Today's Eurozone Situation and the End of Bretton Woods

Sinn, Hans-Werner, The International Economy

The financial community claims nearly unanimously and somewhat vociferously that the eurozone is suffering from a confidence crisis that can only be solved by wielding a "big bazooka." If the rescue fund is large enough, goes the argument, markets will be assuaged, interest spreads will shrink, and the distressed countries will manage to refinance their public debt. But as popular as this view may be, it is far too optimistic.

Of course markets are jittery, and the risk of self-reinforcing runaway processes is real. However, markets have every reason to be nervous. There is not just the self-inflicted instability of mutually infecting speculators, but a fundamental distortion of prices for goods, labor, and capital that would need a currency realignment that is impossible within a currency union. Whoever offers his guarantee for the funds powering the big bazooka should know that such a guarantee will be drawn eventually, given that the debtor countries lack the competitiveness to be able to redeem their debt.

The distortion of prices stems from the bubbles that built up in the eurozone's periphery in the years before the crisis. The rapid interest convergence that took place from 1995 to 1997 in anticipation of the euro induced governments and private agents to overborrow and overspend, making their respective economies overheat. In Greece and Portugal, the borrowed funds went largely into the wages of government employees, and in Ireland and Spain …

Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Article title: European End Game: The Striking Similarity between Today's Eurozone Situation and the End of Bretton Woods. Contributors: Sinn, Hans-Werner - Author. Magazine title: The International Economy. Volume: 26. Issue: 1 Publication date: Winter 2012. Page number: 10+. © 2009 International Economy Publications, Inc. COPYRIGHT 2012 Gale Group.

This material is protected by copyright and, with the exception of fair use, may not be further copied, distributed or transmitted in any form or by any means.