Eurozone officials are considering a proposal to do away with one- and two-cent Euro coins, which cost more to make than they are worth. It may be a worthy cause, but amid historic levels of unemployment, grim economic forecasts, and a financial crisis that threatens the future of the currency itself, it would seem European leaders have bigger problems to talk about.
Economists Robert Barbera, Olivier Jeanne, and Jonathan Wright and political scientist Nicolas Jabko met recently to discuss some of those higher-stakes issues – and the outlook for a European course correction. David Dagan, a graduate student in political science, moderated the conversation.

How has the economic outlook for the Eurozone changed since our first conversation, last fall?

RB: The economic data has done nothing but get worse. Germany’s now deteriorating, Spain’s in a depression. And of course, Italy is having a difficult time.

OJ: I think we agree that in the best-case scenario we are looking at 10 years of slow growth in Europe. From that point of view, I don’t think that we are more optimistic now than we were last time.

If Germany really starts slowing down, would leaders there reconsider some of their policies?

JW: As Bob says, the slower growth in Germany is the most hopeful sign in the Eurozone.

RB: And quite interestingly, we’re getting help in that regard from a very odd place. Germany exports cars to the U.S. and capital goods to China. And Germany competes viciously in those two trades with Japan. Germany had a spectacular tailwind because the yen doubled in value versus the Euro from 2009 to 2011. Well, the Bank of Japan finally discovered that you don’t have to sit by and watch your country go into a depression because of your currency – and they’ve taken the yen from 75 to 100 versus the dollar. And as a consequence, now Germany is getting hit with a big trade headwind. And I think Jonathan’s exactly right – the best hope for Europe is, Germany’s about to hit the skids big time.

OJ: Right, but I am not sure that a weak German economy will move the political dynamics in a good direction in Germany. The European Central Bank can lower its interest rate a little bit more and there may be less pressure for fiscal austerity. But is Germany going to say suddenly, ‘Oh, because our economy is not doing well we are going to support a much more integrated Europe, we are going to support the banking union, we are going to support more fiscal solidarity?’ I don’t see it.

NJ: Well, that’s where the results of the German elections of September 2013 come in, because it really depends what kind of coalition (German Chancellor Angela) Merkel finds herself in. And if you look at what happened in 2008, despite the fact that German officials never talked about Keynesianism, they did quite a big stimulus in comparison to everyone else in Europe. So you could imagine a German stimulus, although they will probably resist a massive episode of deficit spending.

So what kind of political outlook are we left with?

NJ: What’s interesting on the political side is that early on there was this push for austerity. (But) there was a first inflection in the spring of last year when France changed presidents and Italian Prime Minister Mario Monti became a contributing force to the debate on what to do. Monti’s contribution at the time was to push for banking union and to sever the link between banking crisis and sovereign crisis. But there was still an agenda of austerity for at least a considerable part of Europe. And so the next step was when Monti had to step down and you had popular outbursts of anger … in Italy and increasingly in France … And so political factors that existed at the beginning only in peripheral countries are basically moving to the core, and I’m sure that the German chancellor is aware of that. So we’ve now reached a second, more serious inflection point, I think, away from austerity… Now the question is what do you do when you give up (the idea of) austerity? Is Germany going to underwrite an expansion of demand? I have my doubts.

RB: They’re going to move from bloodletting to leaches.

Are there any useful comparisons to be drawn between the European and American austerity debates?

RB: Well, we had the fiscal cliff. That was our opportunity to join Europe into diving into oblivion. And we avoided that. The sequester is nickels and dimes relative to what’s going on in Europe.

OJ: It seems to me the two systems are dysfunctional in different ways. That works to the benefit of the US – not so much by design.

NJ: In the two cases you have central banks and central bankers who are asked to come up with ways to mop up the mess on the fiscal side. And there is only so much that central banks can do. I mean, that’s part of the problem. The Fed can do all the monetary easing that it wants – it’s not going to completely change the game. Same thing for the ECB.

RB: (But) if the ECB had done everything they swore they weren’t allowed to do and then ultimately did (anyway) – if they did it all in April of 2010, Europe would not look like it does now.