Trapped in Euroland

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.

European believers insist that the single currency is really founded on the strong political will to secure eternal peace in Europe. Even if the eurozone might not satisfy the necessary economic preconditions at the outset, economic variables would converge later on. Middle-income, low-price/wage countries would grow faster with a higher inflation rate. The Growth and Stability Pact would safeguard fiscal discipline.