Simply put, Europe’s current institutions are unworkable. The aim of kicking the can down the road must be to create better ones. Before the crisis, capital flowed from Germany (and to an extent small countries such as Austria, Finland, and the Netherlands) into the so-called “peripheral” countries. By importing capital, the peripheral countries were able to import more than they exported, and their citizens consumed more than they saved. In Greece and Portugal, this entailed a great deal of government borrowing, but in Spain and Ireland, the borrowing was largely in the private sector. Then came a loss of confidence in the soundness of this lending, and the capital stopped flowing in.
This kind of “sudden stop” of external financing is sadly common in the annals of international finance. What normally happens is the indebted country finds the value of its currency plummeting. Real wages tumble, and workers can buy less as the value of the currency falls. Eyeball deep in debt, the country’s citizens find themselves working longer for less. Perhaps politicians are inspired by the suffering to enact smart policy reforms that speed the recovery of pre-crisis living standards or perhaps not.
But Spain and Italy and Greece don’t have an independent currency to collapse. In this, they’re hardly unique. In a large country like the United States, sometimes investment flows in to a given area and then halts, damaging the local budget and employment situation. But in the U.S., a jurisdiction facing a sudden investment decline—think of Florida or Arizona today—still benefits from a continued stream of Social Security and Medicare checks. What’s more, unemployment insurance, food stamps, and Medicaid ensures that the worse you get hit, the more federal assistance you get. Last but by no means least, when the local economy collapses, you can always move to another state. And indeed, leaving has long been an important part of America’s adjustment process. Regions whose industries are in decline lose people, regions that prosper gain people, and a desire to not see the entire population flee acts as something of a check on malgovernment.
Europe has none of these protections. Not only are Europeans habitually less mobile than Americans, they have the unfortunate habit of speaking different languages. A person from Lisbon or Seville or Naples is going to have a tough time getting a decent job in Amsterdam or Munich or Helsinki, since few Europeans speak German and nobody speaks the other Northern European languages.
Europe is trapped in a vise between currency values that can’t adjust, populations that can’t move, and regions that don’t support each other financially. This vise has led to, among other things, extremely challenging sovereign debt loads. But rounds of budget cuts treat the symptoms without doing anything to facilitate the underlying adjustments that need to happen. Nor are the linguistic and cultural barriers to intra-European migration going to vanish any time for the foreseeable future.
