Trapped in Euroland

Asians have watched the Greek crisis with a muted sense of vindication. In response to their own crisis in 1997, Asian leaders sought to establish a regional monetary fund to provide liquidity assistance to beleaguered members – an idea that the IMF and the US rejected at the time, but have now embraced for Europe.

TOKYO – The eurozone is sometimes dubbed “Euroland” by Americans (and some Asians).  Given its echoes of “Disneyland,” a place of fantasy, that is a far more mocking than useful nickname.

Ever since the euro was first proposed, skeptics (mostly American) and believers (mostly European) have fiercely debated the economic preconditions for the single currency, its benefits for members, and its political feasibility. Asian economists who promote regional integration in Asia have observed the debate with amazement, in that the fault line is not based on economic philosophy like “Keynesians vs. Neoclassicals” or “Liberals vs. Conservatives,” but on a geographical, transatlantic divide.

American economists, led by Martin Feldstein, have argued that the eurozone’s economies are too diverse, with too many institutional differences and labor-market rigidities, to form an optimal currency area. Moreover, a common monetary policy combined with independent fiscal policy is bound to fail: the former increases unemployment in weaker economies because the interest rate reflects average eurozone indicators (with large weights on Germany and France), but keeps borrowing costs low enough that weak economies’ governments can finance fiscal profligacy.

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