Category Archives: International Business

I recently accompanied a group of EMBA students on a study tour of Germany and Spain. The intent was to study the European Economic Crisis from the point of view of a core country (Germany) and the point of view of a peripheral country (Spain). We benefited from some truly amazing visits with economists and officials on both sides. We were able to speak with folks from the ECB, Deutsche Bank, BBVA, AFI, and a former official of the Spanish Ministry of Economics/Finance.

What struck me is how differently both sides view the crisis. The Germans with whom we met typically view the crisis as a consequence of bad behavior on the part of both private and public actors in the periphery. The Spaniards with whom we met, who do not deny that bad behavior amongst private and public actors played a role, nevertheless view the crisis as one aided and abetted by the countries in the core.

Given the divergent views on the causes of the crisis, both sides, not surprisingly, disagree on how to resolve what ails the Euro zone.

The core is pushing the austerity agenda – e.g., compelling peripheral countries to cut government expenditures and reduce labor costs – to accomplish an internal devaluation to improve competitiveness. Unfortunately, austerity is very painful medicine, and has serious unemployment and social stability consequences.

Peripheral countries, by contrast, are asking for the ECB, and the countries in the core, to do more – e.g., intervene to stabilize sovereign borrowing costs, explicitly allow for greater levels of inflation, engage in stimulus, and/or lessen demands for austerity - as a means of helping the periphery make difficult structural adjustments (i.e., to cushion the blow).

Personally, I think those in the periphery have a point. I don’t think austerity has been working so well – resulting in a deeper, and more protracted, recession. The ECB seems wedded to austerity as an answer, even in the face of evidence to the contrary (though they do seem increasingly open to engaging in quantitative easing – OMT – if necessary). The powers that be in the core, however, have very little appetite for allowing inflation to increase (as memories of the Weimar Republic loom large).

So unfortunately, and especially for the constituents at the core, the issue is not just economic, but political. And as long as those in the core keep pushing austerity as the answer and remain unwilling to come to the aid of their brethren (and part of the problem is that they don’t see them as brethren) in the periphery, the prospects for the Euro remain bleak. How much pain can countries like Spain, Italy, and Greece endure before there they decide that enough is enough and walk away from the Euro experiment? We might not on the precipice at the moment, but without a meaningful compromise, such an outcome might be inevitable.

Nevertheless, as the unbridled optimist that I am, I am hopeful that when push comes to shove, the ECB will intervene and the core countries will do more – ultimately recognizing that they bear tremendous costs should countries like Italy and Spain abandon the Euro. I am also hopeful that once the federal elections pass in Germany (in September), that the current rhetoric in favor of austerity will shift to one that emphasizes European unity and solidarity, with a commensurate commitment to do more to keep the Euro together. But let’s just hope that countries like Italy and Spain don’t reach their breaking point before that happens…