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Q & A: The Never-Ending Euro Crisis

Posted August 24, 2012 | Categories: Q&A
1. You are a professor at the university of Hawaii, but you are going to be in Paris for the next four months. How is that possible? 
I am teaching two courses in a study abroad program at the American Business School in Paris. I’m hoping to have a great time living in Paris and to learn a lot from my very diverse group of students who are mostly from France, Africa, and the United States.
One of the two courses that I’ll be teaching is called “Growth and Crisis in France’s Economy”. About half of the course focuses on how France got to where it is today—a rich country that continues to succeed in the global economy and that faces a big set of economic, political, and social challenges. The other half of the course focuses on the current crisis of the euro, the European currency, and various ways in which the euro crisis might be resolved or the euro currency area falls apart. 
 
2. Are people in Paris talking about the Euro or the economic crisis? 

 When I arrived in Paris about a week ago, it was really hot and most of the people that I encountered looked like they were really suffering from the heat. And when I asked them whether they had been talking with friends about the euro, several said that it was the summer, that they had been talking about the euro for two years, and that they were tired of talking about the euro crisis.

But this week, the mood has changed: the heat is gone, Paris is so much more pleasant, and French government leaders are coming back from their vacations in the south of France to confront, once again, the ongoing fiscal crises that Southern Europe governments—Portugal, Spain, Italy, and Greece, in particular—are facing. And as always the two main questions are: (1) How much aid will northern European countries ultimately decide to extend to southern European countries; (2) will the ECB and national governments work more closely together to resolve the crisis. Tonight the French President and the German Chancellor are meeting in Berlin to try to bridge their policy differences.

 

3. Are there any hints as to the direction that the euro crisis will take? 

If one is a pessimist, one would point to recent economic data that show many European countries heading into recession. Countries in recession usually face expanding fiscal deficits due to lower tax revenues and higher social welfare spending. And bigger fiscal deficits are not what bond market investors want to see. Countries could end up paying higher interest rates on their debt, thus worsening already heavy fiscal burdens from the high debts that southern European countries have already rung up.

If one is an optimist, one would hope that the leaders of both northern and southern European countries had good vacations and had each independently come to the realization that there are feasible ways to resolve the crisis as long as the European governments cooperated more closely. The faint but real signals of a more robust economic recovery in the United States may also be an encouraging sign for future European growth prospects.

 

4.  Is the Euro crisis going to continue for several more years?

Absolutely. Debt crises are never resolved very quickly. But if northern and southern European governments coordinated their fiscal and regulatory policies more closely with each other and with the monetary policies of the European Central Bank, it would not be surprising to see the European economy roar back to life once a credible policy commitment to both economic growth and fiscal health is made.

 

-- Sumner Lacroix

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