Alan Greenspan: Wrong on the Euro

Former Fed Chairman Alan Greenspan has been reenforcing the conventional wisdom that the current eurozone debt crisis can be traced to a strong>north-south cultural divide< between member states. This is the wrong assessment and blaming culture misses the essence of the problem. The reality is that the structure of the euro was unable to enforce fiscal discipline.

Most eurozone members, north and south, struggled to meet Stability and Growth Pact budgetary mandates. Many of them failed and it was France and Germany (northern states) that led the attack to relax its restrictions in 2005.

The institutions required to police the economic behavior in eurozone countries were never effective, likely because to actually work they would need to be so intrusive they could not be agreed upon, then or now. The few disciplinary rules that do exist were never enforced — no member state has ever been fined for violating the Stability and Growth Pact as the treaty provides violators ought to be.

Romano Prodi, President of the European Commission and former (and, then, future) President of the Council of Ministers of Italy, waxed philosophical about the march of European integration on the day the currency entered circulation, January 1, 2002:

The introduction of the euro is not economic at all. It is a completely political step. . . . The historical significance of the euro is to construct a bipolar economy in the world. The two poles are the dollar and the euro. This is the political meaning of the single European currency. It is a step beyond which there will be others. The euro is just an antipasto.

I wonder what the Germans thought about the euro not being economic then.

Ten months later, Prodi, the head of the Union organization bound by treaty to uphold the Stability and Growth Pact that purports to regulate eurozone finances, told Le Monde: “I know very well that the Stability Pact is stupid because all the decisions made under it are so rigid,” and further stated “I do not think that it is the role of the Commission or of myself as President of the Commission to apply rules in that way.” The two quotes tell the entire story of the origin and current state of the euro crisis.

Rather than a cultural difference that inherently renders southern countries incapable of balancing their budget, the crisis is an institutional one that was fully predictable nearly ten years ago. Prodi and the rest built the euro, but full and enforceable integration of budgetary and fiscal policy inside the eurozone never came.