NEW YORK – The dire economic situation in which most of the rich world found itself in 2011 was not merely the result of impersonal economic forces, but was largely created by the policies pursued, or not pursued, by world leaders. Indeed, the remarkable unanimity that prevailed in the first phase of the financial crisis that began in 2008, and which culminated in the $1 trillion rescue package put together for the London G-20 meeting in April 2009, dissipated long ago. Now, bureaucratic infighting and misconceptions are rampant.
Worse still, policy disagreements are playing out more or less along national lines. The center of fiscal conservatism is Germany, while Anglo-Saxon countries are still drawn to John Maynard Keynes. This division is complicating matters enormously, because close international cooperation is needed to correct the global imbalances that remain at the root of the crisis.
Doubts about sovereign debt in Europe have revolved around the euro to such an extent that some now question whether the single currency can survive. But the euro was an incomplete currency from the outset. The Maastricht Treaty established a monetary union without a political union – a common central bank, but no common treasury. Its architects were aware of this deficiency, but other flaws in their design became apparent only after the crash of 2008.
The euro was built on the assumption that markets correct their own excesses, and that imbalances arise only in the public sector. As it happened, some of the largest imbalances that fueled the current crisis arose in the private sector – and the euro’s introduction was indirectly responsible.