By Takatoshi Ito
TOKYO ― The eurozone is sometimes dubbed ``Euroland" by Americans (and some Asians). Given its echoes of ``Disneyland," a place of fantasy, that is a far more mocking than useful nickname.
Ever since the euro was first proposed, skeptics (mostly American) and believers (mostly European) have fiercely debated the economic preconditions for the single currency, its benefits for members, and its political feasibility.
Asian economists who promote regional integration in Asia have observed the debate with amazement, in that the fault line is not based on economic philosophy like ``Keynesians vs. Neoclassicals" or ``Liberals vs. Conservatives," but on a geographical, transatlantic divide.
American economists, led by Martin Feldstein, have argued that the eurozone's economies are too diverse, with too many institutional differences and labor-market rigidities, to form an optimal currency area.
Moreover, a common monetary policy combined with independent fiscal policy is bound to fail: the former increases unemployment in weaker economies because the interest rate reflects average eurozone indicators (with large weights on Germany and France), but keeps borrowing costs low enough that weak economies' governments can finance fiscal profligacy.
European believers insist that the single currency is really founded on the strong political will to secure eternal peace in Europe. Even if the eurozone might not satisfy the necessary economic preconditions at the outset, economic variables would converge later on.
Middle-income, low-price/wage countries would grow faster with a higher inflation rate. The Growth and Stability Pact would safeguard fiscal discipline.
During the eurozone's first, prosperous decade, European believers seemed to have won the debate. Eurozone countries grew at a reasonably high rate, per-capita income and price levels converged, and interest-rate spreads narrowed, with only occasional minor turmoil in the markets.
Several countries successfully joined the eurozone after fiscal and monetary reforms. More are waiting to do so. The euro has become the second key currency in international finance.
Asians have watched the formerly triumphant euro's Greek crisis with a muted sense of vindication. Back in 1997, many Asians thought that the speculative attacks then being mounted on Asian currencies were unjustified, with Malaysia's Prime Minister Mohamad Mahathir leading the charge against speculators.
In response to the crisis, Asians sought to establish an Asian Monetary Fund, which would help any crisis-hit country by providing massive liquidity assistance. The very announcement of the Fund's creation was meant to deter speculative attack.
But the International Monetary Fund and the United States rejected the idea. Now the Europeans are setting up a European Monetary Fund ― a nickname that Europeans may oppose ― in cooperation with the IMF.
But announcing an IMF program (with regional bilateral assistance) was not what calmed markets in South Korea and Indonesia in 1997.
In the end, South Korea was saved by coordinated forced rollovers of foreign banks' lending (why not try that in Greece?), and Indonesia experienced financial meltdown, because the country could not fulfill much of the IMF's conditionality. (The new, gentler IMF has sworn off such harsh conditionality for Greece.)
Two differences between the Asia crisis of 1997 and today's Greek crisis stand out. One concerns who borrowed the money. In Greece, the problem is with sovereign deficits (much of it long concealed), while the problem in Asia was unmonitored private-sector debt.
The second difference concerns the exchange-rate regime. The U.S., the IMF, and others had encouraged Asian countries to increase exchange-rate flexibility. The depreciation that followed the crisis helped accelerate recovery by boosting exports.
Indeed, given that depreciation is a key tool for engineering a fast economic recovery, why not invite Greece to leave the eurozone?
After all, by staying in the euro, a rapid export-led recovery would be impossible. The only other way to achieve depreciation in real terms is through massive deflation of domestic prices, coupled with a severe recession.
Moreover, all of Greece's structural problems ― a thin tax base, large numbers of government employees who receive bonus payments, and generous pension benefits ― cannot be sustained within the eurozone.
But solving any of them will be extremely hard, and if these problems are not resolved in Greece and other troubled eurozone members, these other countries will follow the same path.
Even the European Monetary Fund may not be enough to save the day then, because those now on the side of the rescuers would become those in need of rescue.
Any financial crisis looks like a liquidity crisis for those who are stuck in the middle of it _ or anywhere nearby. The same crisis looks like a solvency crisis for those who are geographically distant.
And crises are repeated in different regions, triggered by strikingly similar economic and financial mechanisms, though the details of course differ. As Carmen Reinhart and Ken Rogoff have written, everyone near a financial crisis thinks ``This time is different."
But the evolution of the Greek crisis is different from the Asian crisis. Europeans now have a regional monetary fund, which Asians wanted but could not have. The political will to protect the euro is strong ― perhaps strong enough to override moral-hazard concerns.
To keep the eurozone intact, regardless of the cost, became Europe's only viable option once the single currency was adopted.
So, as ``euroland" risks breaking up over the Greek crisis, musically-versed economists recall the cryptic last line of that 1970's pop song ``Hotel California" by the Eagles: ``You can check out any time you like, but you can never leave."
That line resonates as Germany and Greece contemplate their shared fate. Their worries are an object lesson for those Asians who are still contemplating deeper economic integration in the form of a shared currency.
Takatoshi Ito, professor of economics at the University of Tokyo, is a former Japanese deputy vice-finance minister for international affairs and senior advisor in the research department of the International Monetary Fund (IMF). For more stories, visit Project Syndicate (www.project-syndicate.org).
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