Why Only Germany Can Fix the Euro

Blyth_411Matthias Matthijs and Mark Blyth in Foreign Affairs [h/t: Jonathan Hopkin]:

What, we must ask, has driven Europe to this point? Since the beginning of the current economic crisis, analysts have offered multiple explanations. American economists call it a “crisis of design,” arguing that Europe had it coming. Fiscal hawks the world over prefer the budgetary explanation, focusing on Greece's underreported public spending, bloated state, and generous pension system. They then generalize these problems to all of Europe (never mind that Italian private debt is relatively low, as is its public spending in comparison to most other developed countries). For their part, elites in Germany blame lagging competitiveness and “too-high” real wages in the Mediterranean countries. Still others point to intra-European macroeconomic imbalances. There is probably something to all of these explanations. But the depth and duration of this crisis call for a more complex, systemic, and historical account. After all, when explaining the collapse of a bridge, there is little point in blaming the last vehicle that crossed it.

This complex of causes does however have a common root: Germany's failure to act as a responsible hegemon in Europe. It is not that Germany should be unseating democracies and enforcing deflation, as it has attempted to do by installing Papademos in Greece and Monti in Italy. Rather, it should be stabilizing the eurozone by providing a set of public goods that the institutions and policies of the region have singularly failed to supply. To solve the European crisis and avoid repeating the mistakes of the late 1920s and the 1930s, those sitting in Berlin and Brussels should put down their Andrew Mellon and read Charles Kindleberger.

In The World in Depression: 1929-1939, Kindleberger argued that “the 1929 depression was so wide, so deep, and so long because the international economic system was rendered unstable by British inability and U.S. unwillingness to assume responsibility for stabilizing it.” Indeed, Kindleberger's critique of the United States' role in that era's crisis summitry might well have been written about Germany today: “The World Economic conference of 1933 did not lack ideas … [but] the one country capable of leadership was bemused by domestic concerns and stood aside.”