Tyler Cowen on the European Crisis

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🗓️ 5 December 2011

⏱️ 58 minutes

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Summary

Tyler Cowen of George Mason University talks with EconTalk host Russ Roberts about the European crisis. Cowen argues that Greece is likely to default either in fact or in spirit but that the key question is which nations might follow--whether Italy and Spain can find a road to economic health and honoring past debts. Cowen gives his best guess as to what is likely to happen to the euro and the European Union and the implications for the rest of the world. He explores some less likely scenarios as well. He is pessimistic about Greece and the short-run prospects for preserving the status quo, but he is optimistic in the long-run about the European Union though it may have a different structure down the road.

Transcript

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0:00.0	Welcome to Econ Talk, part of the Library of Economics and Liberty. I'm your host Russ Roberts
0:13.9	of George Mason University and Stanford University's Hoover Institution. Our website is econtalk.org
0:21.2	where you can subscribe, find other episodes, comment on this podcast, and find links to
0:26.5	other information related to today's conversation. Our email address is mailadicontalk.org. We'd
0:33.6	love to hear from you. Today is November 28th, 2011, and my guest is Tyler Cowan of George
0:43.6	Mason University. Tyler, welcome back to Econ Talk. I'm happy to be here Russ. Our topic for today
0:49.6	is the situation in Europe. We are taping this as I said on November 28th. It will air one
0:56.0	week from today if all goes well, and we understand that events may overtake this podcast, so we
1:02.9	will do the best we can. Let's start with the problem. What is the problem facing Greece and Italy
1:09.8	and perhaps Spain and what other other countries you want to include in that problem group?
1:14.0	The Eurozone is like the proverbial elephant. There are 17 different ways of describing the
1:20.2	problem, and most of those ways are correct, but which is the most important way depends on your
1:25.4	point of view. Here's how I see it. The arrangement behind the Euro, the common currency, was never
1:31.8	workable in the first place. Principle one, no monetary union without a fiscal union. Principle
1:38.6	two, no fiscal union without a common electorate. Europe is very far from having a common electorate,
1:44.5	but that said, the more practical question is, how did this all unravel? And if I may have
1:50.0	just about a minute, I'll run through what I think the core problem is. Let's say before all
1:55.0	the trouble started, you're comparing two banks. A Euro in a Greek bank in Greece and a Euro in
2:02.3	a German bank in Germany. A few years ago, the markets treated those two assets as basically
2:08.5	equivalent in value, and in very good times they are. The Greek banks were solvent, the German
2:13.3	banks were solvent, matters proceeded. But when times turn bad, they're not equivalent assets at
2:18.9	all. The Euro in the German bank is worth quite a bit more than the Euro in the Greek bank. The
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