Some frequently asked questions to our in-house expert, my husband James.
Q: Why is this an interesting time to be an economist in Europe?
A: The economy and financial system of Europe are under such incredible stress. There is a chance that there could be a big financial crisis in Europe, leading to countries, including France, leaving the Euro.
Q: So does that mean that everything is cheap in France now for Americans?
A: Not at all, even though the Euro is getting cheaper compared to the dollar. The Euro is twenty cents cheaper than it was a year ago–$1.24 today compared to $1.44 a year ago, a drop of about a 14 percent. So for an American, everything in Paris is about 14 percent cheaper than it was a year ago.
Q: Have you been surprised by prices in Paris?
A: Some things are cheap, like really good wine and cheese, and the shoe stores on our block don’t seem that expensive. The Metro is fairly cheap, compared to the subway in New York City. By contrast, we had to buy a tube of wood glue, which cost about $8, several times more than it would cost in the U.S. Medicine and toiletries are generally very expensive. Once we spent $47 for two falalfel sandwiches, a beer, and a glass of orange juice, but that was in a tourist neighborhood. I’ve also noticed a lot of homeless people on the streets, even in our bourgeois neighborhood.
Q: Are you going to travel to Greece, since everybody thinks it must be super cheap there now?
A: No. It’s not super cheap, which is a large part of the problem. If Greece left the Euro zone, then their exchange rate would plummet, and everything would be much cheaper than it is now, overnight. But since they’re in the Euro zone for now, they’re stuck.
Q: Can you explain the Euro crisis?
A: It’s instructive to compare Spain and Florida. Both places had huge housing booms and busts. Both places share a currency with a larger and economically stronger area. But Florida automatically gets large transfers from the federal government (through unemployment insurance and Social Security payments, for instance), and it’s fairly easy for people in Florida to move elsewhere in search of work. By contrast, Spain does not receive big transfers from the rest of Europe, and it is difficult for Spaniards to move to countries where they don’t speak the language in search of work.
Q: How is the situation different for Greece and Spain?
A: Greece is very small and the Greek government ran a huge deficit before the crisis. Spain is very large and the government had a budget surplus before the crisis. The Euro zone could survive the departure of Greece but probably not the departure of Spain. The departure of Spain, because it’s such a large country, would probably prompt other countries to leave the Euro zone and the whole thing would collapse.
Q: Why is Spain having a crisis?
A: Because they had a gigantic housing boom and bust, even bigger than in the U.S.
Q: If you were the head of the European Central Bank, what would you do?
A: I would massively buy up Spanish and other countries’ bonds in the hope of causing inflation.
Q: Why would you want inflation?
A: If you can’t have the Euro depreciate, the next best thing is to have faster inflation in Germany than in Spain or Greece. Somehow, prices in Germany need to rise relative to prices in Spain and Greece. Spain and Greece are running huge trade deficits because their goods are not competitive on the world market. To become competitive, prices have to become lower, relative to prices in Germany.
Q: Why hasn’t this already been done?
A: Germany wants to have it both ways: They want the Euro to survive, but without inflation and without spending more money to rescue Greece and Spain, which I don’t think is possible. If Germany wants the Euro to survive, they need to accommodate this adjustment.
James Harrigan is a Professor of Economics at the University of Virginia. From August 2012 to August 2013, he will be a Visiting Professor in the Department of Economics at Sciences Po in Paris. Visit him at http://people.virginia.edu/~jh4xd/
Very informative and interesting interview. Enjoyed it very much!
More inflation!! can you really recommend that? Inflation penalizes the thrifty and rewards the shiftless. ie. ant and grasshopper. Surely there is something else to be done? Why not lower Greek prices? Would Germany lower theirs and trigger a race to the bottom; or maybe China, other asian countries would do so. What do the Greeks sell on the international market anyway? Tricia
Olive oil, I think.
James says his views are very mainstream, among American economists.
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