Happy 2011?

by Charles Wyplosz

Vox
January 5, 2011

Is the worst of Europe’s crisis behind us? Or yet to come? This column looks at 2011 and argues that the Eurozone crisis offers a unique chance to correct the “dreadful mismanagement” of the past year.

2010 was a dreadful year for Europe. Yet no one expected it to be quite so dreadful. Exactly one year ago, there were good reasons to be worried about Greece and what a Greek sovereign debt crisis would mean for the Eurozone. Indeed, contagion to other Eurozone countries in difficult fiscal situations was a distinct possibility. So, where was the surprise? The real surprise has been the woeful mismanagement of the crisis. The Eurozone architecture is a shambles. The many plans that have been mooted, in fact pre-announced but not carefully worked out, have collapsed one after another, and the end is not in sight. The unthinkable breakup of the euro is no longer contemplated just by those who never believed that it could work, it is becoming a credible scenario – though it must be said not the most likely one. The Commission has been sidelined. Recovery is on hold.

In a way, the European debt crisis is just bringing to the fore well-identified cracks in the Eurozone construction. These cracks were hidden by policymakers. We knew all along that fiscal discipline was left in the careless hands of national governments, that banking regulation and supervision was delegated to national authorities more interested in promoting national champions than in completing the Single Market, and that crisis management would be masterminded not by the Commission but by national governments with poor analytical support. We thought that, at least, the staunchly independent ECB would remain a beacon of careful and precise thinking, only to discover that monetary policy dominance – the ability of a central bank to reject responsibility for enforcing the budget constraint – is extraordinarily fragile1.

What about 2011, then? The pessimists consider that the dominos will fall one after the other because the absence of a responsible European government is a fatal flaw. The optimists still look forward to a change of direction that will correct for past mistakes, those in the design of the Eurozone and those accumulated over 2010. With every day that passes it is harder to remain in the optimist camp. As always the situation is made worse because economists disagree on everything, from diagnosis to policy recommendations, leaving panicked policymakers with the firm view that economics is largely useless and that anything can be done if it makes good political sense. Here is a partial list of clouded but vital economic and political issues.

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