The United States of Europe

While national parliaments in Europe are voting for the new Greek bailout, here’s an excellent counterfactual showing where Europe could be now if it had a real union:


That’s the summary of the choices that Europe made (and continues making) since at least 2000. If the year of 2009 explains itself with toxic assets and international shocks, the second dip is a European invention. It started with politicians denying the intention to bailout the indebted EU members. This ambiguity provoked the sovereign debt crisis in 2011-2012. The debt crisis, in turn, increased the cost of borrowing for the European countries that had to counteract high unemployment. Unable to do so, the periphery retained its 20-plus percent unemployment and the loss of output that followed.

To that the European Union responded in slow motion. The European Financial Stability Facility — the major vehicle of intra-EU bailouts created in 2010 — had been expanding constantly in response to the deteriorating situation in indebted economies. But actions took place only after the bad things had happened.

Now take the United States, which settled its major debt issues via the TARP in 2008-2009. More importantly, it was the federal government that paid $700 bn for this program. The American states didn’t waste time figuring out which state government was unacceptably immoral and, therefore, should have been reformed. In a hypothetical scenario, they could. The poorest American states have only a half of output per capita produced by the richest states. Also, the recovery was uneven:


Secondly, the US had the Fed that provided liquidity regardless of the bank’s state of origin. Meanwhile, as the first figure reminds, the ECB-led eurozone performed worse than the EU on average (and much worse compared to the nine EU countries that retained their national currencies).

This problem is much bigger than the Greek case alone. With Greece, European politicians ignore the most respected macroeconomic experts making reasonable arguments. But these politicians are not supposed to listen to the reason, if by reason we understand the wellbeing of an average European. Merkel and Schauble are accountable to the German voter, not to the Greeks. And the German voter is fine with paying nothing to Greece. He can continue enjoying low unemployment at home — even if this became possible thanks to the euro weakened by the indebted EU members.


Paul Krugman shows the divergence between Sweden and Finland. Finland is a eurozone member lagging behind Sweden, with an overall picture similar to the first figure here.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s