Welcome to our new video series titled "New Economic Thinking." The series will feature dozens of conversations with leading economists on the most important issues facing economics and the global economy today.
This episode features Kiel Institute President Dennis Snower talking the euro zone crisis. Snower, a member of the Institute's Council on the Euro Zone Crisis, says that E.U. reforms should be embedded in a national constitutional process rather than imposed by a bunch of faceless “eurocrats” from Brussels. He also explains why understanding this political dimension to the crisis is key for anyone who wants to save the European project. Below is an introduction from interviewer and Director of Institutional Partnerships Marshall Auerback. Watch the interview to see what Snower has to say!
Is the euro zone crisis a political crisis or an economic one?
Most economists who have discussed the issue have largely focused on the narrow question of economic austerity and its role in terms of exacerbating renewed euro zone-wide tensions and repeated threats to systemic stability.
But there also is a political dimension to the crisis.
The great achievement of the European Union has been to reduce the probability of violent nationalist conflict among some of its members to a vanishing small probability while – at least until 2008 – improving the economic lot of its members. But in spite of the salesmanship surrounding the adoption of the single currency zone, much of this reduction in the propensity toward violence and economic growth took place before the adoption of the euro.
At the time the euro was launched, there was much hopeful talk that a surge in trade and investment between the euro zone nations would create a truly unified European economy in which national levels of productivity and consumption would converge on each other. It was also assumed – or perhaps just hoped – that the euro would create political convergence. Once Europeans were using the same notes and coins, they would feel how much they had in common, develop shared loyalties, and deepen their political union.
The designers of the single currency also hoped for another form of convergence, between elite and popular opinion. They knew that in certain crucial countries, in particular Germany, the public did not share the political elite’s enthusiasm for the creation of the euro. But they hoped that, in time, ordinary people would embrace the new single European currency.
This wish has clearly not been matched by the reality. Crudely speaking, markets today are calculating that governments lack the shared political commitment to underwrite the stability of the single currency. The market’s skepticism is enhanced by the policy incoherence at the supranational level by the ECB, with its ongoing embrace of austerity that has gained favor among policymakers across the world.
So how to sustain the euro’s political momentum going forward? Dennis Snower, President of the Kiel Institute for the World Economy and Professor of Economics at the Christian-Albrechts-University of Kiel, argues that further top-down reform done in the absence of any kind of national political legitimacy put the very notion of a “United States of Europe” at risk.
Snower suggests that many of the proposals championed by Germany in particular would have a better chance of succeeding if they paid greater heed to local conditions and historic and cultural traditions. He says that reforms should be embedded in a national constitutional process rather than imposed by a bunch of faceless unelected “eurocrats” from Brussels. And he explains why this political dimension to the crisis is key for any attempts to try to save the European project. Watch the interview to see what he has to say!