THE ARCHITECTS of the European single currency apparently paid little heed to globalisation or the rise of
In retrospect this looks a huge omission.
This is because globalisation has proved to be a huge asymmetric shock to the Eurozone. An asymmetric shock is one of the things that creates real problems for fixed exchange zones, because it is an economic shock that affects the different parts differentially.
One way of looking at this is to use the
This is a complex measure, which considers whether the exports from one country are more likely to compete with exports from another. It shows that 46 per cent of German exports are complementary with Chinese goods, whereas only 22 per cent of Irish exports are such. The Germans make things like machine tools and high-quality cars that the Chinese want to buy. At the other extreme, the textile industry, which not so long ago was a staple part of industry in southern
Normally, exchange rate flexibility is one of the cushions to the pain of asymmetric shocks. But in a fixed exchange rate system, this isn't there. Instead, countries have to rely on internal devaluation, which is a painful process since it damages domestic consumer spending at the same time as it boosts exports and curbs imports.
This has created the second Eurozone problem - government debt. Excessive spending in relation to lower-thanexpected GDP has meant deficits which have cumulated to create unsustainable debt. Although the structure of the euro, with its lax fiscal discipline, meant that the consequences of excessive spending were only faced after a long delay, these problems would have had to be addressed at some point in any case.
So globalisation was behind the euro crisis. But globalisation has also rescued the euro.
The composition of the Chinese government's huge accumulated portfolio of overseas assets is a state secret, though their total - at
This investment is what has caused the euro crisis in the financial markets to go away. There is no shortage of conspiracy theories for why the Chinese might like Europeans to be in their debt. But
So globalisation was probably the single most important explanatory factor behind the euro crisis. But it was one of the consequences of globalisation - the Chinese accumulated reserves - that saved the euro from being wrecked as the markets took against it two years ago. This doesn't mean that the future of the euro is assured. Ultimately, it will depend on whether the Germans can vote for subsidising southern
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