These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:
The European summit this week will feature a standoff between German Chancellor Angela Merkel advocating austerity and French President Francois Hollande promoting stimulus to boost growth.
Neither position is without merit, but neither by itself will solve what ails Greece and other failing European nations. Sadly, none of the leaders involved, including the insurgent left most likely to win the next Greek elections, appear willing to accept that a successful strategy to put Europe back on track will require abandoning the euro and returning to national currencies.
After the single currency was introduced in 1999, productivity growth was slower and prices rose faster in southern Europe than in Germany and other northern states owing to both cultural and immutable geographic conditions. Consequently, the north enjoyed growing trade surpluses at the expense of deficits in the south.
Trade deficits can instigate high unemployment and curb tax revenue, and to support employment and social programs on a par with their northern neighbors, the Greek, Italian and Portuguese governments borrowed too much.
In Spain, northern Europeans purchasing second homes and vacationing in its sunny climate instigated a rush of foreign funds into its banks to build dwellings and hotels. Spain actually had budget surpluses prior to the 2008 global financial crisis, and its trade deficits were financed by bank borrowing from foreign sources and questionable loans to homeowners: the U.S. model of excess. Continue reading…