FT Alphachat · Financial Times

Waltraud Schelkle and Ashoka Mody: Is the eurozone fixable?

March 8, 2019·40 min·2 clips

Ashoka Mody argues Mario Draghi's magic wands cannot save Italy from 20 years of fixed exchange rates and zero productivity growth.

Europe enters the argument in bad shape. The cold open moves through cheap ECB loans for eurozone banks, possible help for Italian banks, and weak manufacturing numbers across Europe. The question stays narrow on purpose. Can the European Central Bank do enough for the weakest countries in a monetary union where productivity and competitiveness are hard to fix? Greeley puts productivity at the center. From there, the excerpt moves from system design to the damage left after almost 20 years of the euro. The first decade did bring convergence, especially as southern living standards caught up with the north through capital flows that fed consumption and investment. Expansion east added another path, first through equity investment and then through short-term capital flows. Then came the adjustment, and it was rough. The east was hit first. The south later faced its own hard reckoning. Debt did not fall through discipline. It climbed above pre-crisis levels, leaving countries dependent on ECB policy to stop market rates from getting harsher. The euro still stabilizes things. Mark notes that without ECB support, the adjustment would probably hurt even more. But the social damage has not gone away. Youth unemployment in southern countries remains very high, even where it has come down. Younger cohorts have missed out on asset formation. The economies may be growing, but the growth described here is weak and sclerotic, which matters if recession starts from an already fragile place. Portugal and Italy complicate the convergence story: Portugal stayed flat, while Italy lost its gains.

As heard by us

A sharp eurozone debate that turns productivity, capital flows and crisis scars into live economic pressure.

The eurozone's structural problem gets a brisk, useful airing here: what can the ECB really do for weaker economies when growth is soft, bank stress is visible and countries no longer have their own currencies to devalue?

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Why you'd press play

Two economists, one currency, and a hard question about Europe’s future.

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