Optimism About an End to the Euro Crisis Is Wrong, Essay Example

Article Basic Information

The article I selected for examination in the paper is “Optimism about an end to the euro crisis is wrong.” The author of the article is from the Financial Times: Wolfgang Manchau. The article was published on October 27, 2013.

Analysis Information

The author of this article, Wolfgang Manchau, is writing for a wide-range of stakeholders: economists, businessmen, policy makers, and industries. One could also make the argument that Manchau is writing for the general public, but that argument may not be true in that the Financial Times is not usually read by the average man/ woman. Manchau argues in the article that the current optimism surrounding the eurozone’s economic recovery in general, and current account adjustment in particular, is profoundly misplaced. Indeed, Manchau posits that while positive cyclical news emerging from some periphery countries (e.g., increased exports in Spain) may be encouraging to some, it is not indicative of the deeper structural policy and economic issues that need to be resolved for future economic growth. The article was likely written for myriad reasons: 1) Nearly two years after the onset of the “Euro Crisis”, many observers believe the region is near the end of the cyclical nadir; 2) At about the same time this article came out, the US Treasury put forth a controversial argument in a report regarding Germany’s culpability in the Euro crisis- this article is also meant to put such criticisms in context.

Analysis Primary Details

The author’s thesis, although not explicitly stated in one sentence, is roughly along these lines: The current optimism surrounding the recovery of the Eurozone economies and structural adjustments in the peripheral economies is a false dawn. Although a growing corpus of statistics may show that the current account deficit in peripheral countries is decreasing, the true economic and policy adjustment needed to bring about recovery has not still occurred- particularly from Germany. The primary questions addressed in the article are the following:

• What does the current data augur for the economic recovery in peripheral countries such as Spain and Italy?
• What is the true economic state of the Eurozone? What policies should member countries adopt in order to facilitate economic growth?
• What policy should the ECB adopt in order to facilitate economic order and towards the Euro?
• When will the Eurozone crisis be over?

Manchau uses a series of different data points in order to make his argument. First, he cites the current account surplus figure of the Eurozone (2.3%) and also quotes the IMF’s estimate of the Eurozone’s projected current account surplus for the year (2.5%). He cites this data point against those who believe that an adjustment is actually occurring in the Eurozone: Manchau argues that while the current account surplus is indeed growing for the regional block, this is not because current account surplus countries are adjusting against each other (i.e., Spain and Italy decreasing the existing current account deficit, while Germany decreasing the current account surplus). The currency of the Eurozone continues to appreciate against the dollar Manchau quotes the euro/dollar value at the end of the week (1.38) as the currency’s appreciation is offsetting the continent’s (re) adjustment. Manchau finishes his use of statistics through quoting IMF estimates included in the agency’s Economic Outlook.

Other than quantitative methodologies, Manchau also uses robust qualitative reasoning to make his point regarding the Eurozone. For example, Manchau appropriates IMF economic reasoning to make sense of why Spain’s decreasing current account surplus may be cyclical rather than structural in nature. Indeed, although Spain’s export performance is improving leading to a lower trade deficit, there are two types of price change that must occur in order to signify an internal adjustment: 1) the prices of non-tradable goods have to fall relative to those of tradable goods; 2) the prices of Spanish tradable goods would have to fall against those of non-Spanish tradable goods elsewhere in the Eurozone. Currently, none of those necessary adjustments are happening; not only that, but it is the outward flow of capital that has been a large part of the structural adjustment. Manchau argues that the size of the future adjustment in the Eurozone is so daunting that it has not even begun yet.

To make this point, Manchau once again quotes IMF analysis to indicate the magnitude of future adjustments needed to return the Eurozone to growth. He quotes “The IMF reckons that reducing net external liabilities to levels that would be considered healthy elsewhere would need ‘much larger relative price adjustments that implied by the need to reverse past unit labour cost appreciation or to achieve current account surpluses.” This analysis essentially means: The Eurozone has a lot further to go then many in the policy and financial world appreciate, especially because many Eurozone countries have not begun the price adjustment process needed to cut demand and cut the current account surplus.

Due to the enormity of the adjustment needed, however, Manchau is pessimistic it will happen. This is also because many Eurozone countries have not promulgated policies that will facilitate the needed adjustment. In particular, Manuchau signals out Germany: Although the country has not been willing to undertake substantial domestic policy reform to increase wages and perhaps make exports less competitive in world markets, Angela Merkel has voted to “bail out” peripheral countries through direct fiscal injections and bond purchases by the European Central Bank. Manchau is not optimistic, however, regarding a change in austerity for the country, even under the new grand coalition. The author does not make any suggestions for future research questions related to the article.

Overall, Manchau is pessimistic regarding the will of Eurozone leaders to tackle a crisis that has gone on for roughly three years now. In the final paragraph he states the following: “In a monetary union adjustment is hard without transfers and without a fiscal union. I know of no plausible plan how the Eurozone can manage the dual feat of economic adjustment and debt sustainability within the straitjacket of official policy. And as long as such a plan does not exist, the crisis is not over.” This sums up his pessimistic attitude toward the recent “optimistic” data releases, as well as the overall progress made during the Euro crisis. Manchau also has other places in the article where he is less than optimistic about the future of the Eurozone. “Adjustment remains possible in theory- but a scenario in which the Eurozone adjusts is inconsistent with stated policy;”

Overall, Manchau presents a compelling case why optimism for the Eurozone may not be warranted. Although some countries are experiencing cyclical improvements in the current account balance, overall, this is not a deeper signal of overall progress in economic reform. Manchau’s article made a profound difference in how I understood and conceptualized the Eurozone crisis. Whereas previously I thought the Eurozone had made the necessary adjustments in order to return back to growth, I found out this is likely a false dawn. Indeed, the surface reforms of the Eurozone have not really dealt with the issues at hand.

Overall, I enjoyed this article by Manchau in that it helped me to understand better concepts presented in the course. When I was learning about abstract concepts such as the current account surplus and deficit and the capital account surplus and deficit, I had little context of what they ultimately meant in the real world. Manchau’s use of the Eurozone crisis as a means to understand these terms better was very useful. In particular, as we learned in class, in order for a country to run a current account deficit another must run a current account surplus. While this relationship is complex enough between two countries, it is even more complex in a single currency unit such as the European Union. In order for current account deficit countries such as Spain and Italy to cut down those deficit levels, they must not only go through dramatic internal reforms, but it also requires the cooperation of other countries in the Eurozone (e.g., Germany) for it occur.

I also learned the importance of currency in understanding how different countries adjust. The Euro during the crisis had consistently depreciated against other major global currencies: dollar, yen, and franc. Recently, however, the Euro has been appreciating against these currencies as capital inflows soared in the Eurozone. It was helpful to put it in this context.

Finally, I learned the importance of central bank policy in decisions. The ECB is often times overshadowed by the aggressive measures of the US Fed; however, the ECB has played an aggressive role in the Eurzone crisis to help promote economic recovery. These policy measures have included: the ECB providing liquidity to European banks, as well as buying the bonds of peripheral states in order to keep down the interest rates in those countries.

Overall, the author made a strong case that despite analysis to the contrary, the adjustment in the Eurozone is large and really has not begun yet. This article has changed my view point on the matter and will serve as a key takeaway from this class.