Europe Needs a California Dream

by Uri Dadush and Moisés Naím

Wall Street Journal
November 12, 2010

At first glance California appears to be in the midst of an economic and fiscal crisis that dwarfs Europe's. Its unemployment rate, now more than 12%, is one of the highest in the U.S. and nearly 3% more than the EU average; California's home prices have dropped 34% since 2007, while in Europe the decline has been moderate; and over the last three years, the collapse of California's tax receipts produced a cumulative budget deficit of about 40% of its revenues, more than twice that of Greece. California's politics are as gridlocked as any in Europe. Political infighting left the state without a budget for the first 100 days of this year.

Paradoxically, despite this grim picture, it is actually Europe that should be envious of California. In fact, as countries in the euro area rethink the institutional arrangements that underpin their monetary union, there is a lot that Europeans could learn from the vicissitudes of America's Golden State.

This year's sovereign-debt crisis in the European periphery was triggered by the same global recession that engulfed California. The deeper roots of Europe's woes, however, lie in the loss of competitiveness of Greece, Ireland, Italy, Portugal, and Spain relative to Germany and the European core. With growth stifled and debt rising rapidly, the overextended governments in these countries have lost the confidence of financial markets.

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