Barro, essentially a more caustic and careless version of
Friedman, writes with an air of certainty and irreverence for the more liberal
minded. Armed with his go-to principles of property rights and free markets, he
tackles a number of worldly issues through his distinctly libertarian lens. This
post will apply some of his spirited insights to the recent Eurozone crisis, where
his stalwart views on fiscal policy, monetary policy, optimal country size, and
even secession come into play.
First, like many conservatives he does not hold Europe in
particularly high esteem. The high level of government involvement/regulation and
income redistribution “inevitability reduces the incentives for investment,
work effort, and growth”. Though the political
systems may be highly democratic, he explains that democracy does not underlie
economic growth and prosperity, rather it is fundamental economic freedom that
spurs it around the world. He would accuse the Western European democracies of
meddling too much with their economies and thus stunting growth.
While Barro entertains the benefits of a unified currency in
Europe, due to significant reductions in transaction costs, he opposes further
unification of the disparate member countries. His argument is not
Europe-specific, it follows from his general principle that large countries
composed of heterogeneous parts will encounter problems due the diversity of
its population. Though the United States would seem to be an obvious
counterexample to this theory, he contends that the US would benefit greatly from
less centralized federal control and uniform policies. He envisions a system
with strong states rights and fewer uniform national laws. Basically, he doesn’t
understand why the Eurozone would strive to mimic the US by unifying its
several states, particularly given the large cultural differences between
countries. He has a Rousseau-like conception of the ideal size for a healthy
state, which on his account should generally be homogenous and always open to
international trade. Given his views on secession, he also urges these smaller countries
to limit their ties to a central authority, and keep an exit plan in their pockets
in case things go south (like when Greece implodes, for example).
So, he wants the best of both worlds. The uninhibited
mobility of labor and capital between member countries, without any of the
governmental strings attached to unified fiscal policy. Indeed, he sees fiscal
policy as minimally effective (his Keynesian multiplier is essentially zero). He
would be love to turn back to the clock to the EU’s status as a mere customs
union, just as he has no qualms about the United States developing as two separate
nations. The EU’s motto is “United in diversity”, which could not be more
antithetical to Barro’s central arguments. For Barro, diversity is more curse
than blessing, and should spur separation and not unification. From the constant
scowl on Merkel’s face these days, looks like she’s starting to feel that way
too…
This application of Barro’s principles to the Eurocrisis can
actually be compared to his current stance on the issue, as published recently
in the WSJ. He expresses a reversal of opinion by claiming that even the common
currency should be abandoned, as it has proved to be inevitably linked to a
centralized governing body. This body, made up of a hapless central bank, the
IMF, Merkel, and a handful of other influential figure, steers member countries
in far more than monetary policy, and their role is unlikely to subside
post-crisis.
Instead, he suggests that the Eurozone cast out feeble countries
like Greece, instead of a crusade to weather the storm as a unified Europe. He
also outlines a solution for jumping ship on the Euro currency all together,
beginning with a parallel German currency. Not a fan of the too-big-to-fail
mentality, he says that Italy will “probably” survive the transition to a new
currency. His approach to the crisis is unorthodox, and thankfully not mainstream.
We may be well advised to heed his warning, however, that the US may well be
heading towards its own version of the Euro debt crisis, as indebted states
struggle to deal with their budget woes.
Modern Day Barro:
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