I got back three days ago from my trip to the US and am still sludging through my jet-lag, but there are two quick takeaways from the trip I should mention. First, my Washington meetings convinced me (no big surprise here) that, just as it is doing in Europe, the issue of trade is getting more political attention than ever, and the adverse employment impact of the US trade deficit is an issue that will not easily subside. I did not leave Washington feeling that my worries about a rise in trade tensions were in any way exaggerated.
Second, I met with at least 30 different institutional investors, and perhaps the fact that my trip coincided with the twelve labors of Greece, or however many they have, worry over China and the state of the world economy was deeper than on my previous trips. For reasons I have often discussed on this blog, I have never been a believer in the survivability of the euro, and many of the people I met on this trip had heard me over the past decade express my doubts, so meetings that were ostensibly on China often became meetings on whether Greece, Italy, Portugal, Ireland or Spain will be forced to exit. Everyone wanted to know if turbulence in Europe would hurt China (I think it definitely would, especially if it came when there were worries about the Chinese financial system).
In the meetings where we discussed the euro I nearly always made reference to a thesis argued in Barry Eichengreen’s magisterial Golden Fetters (one of my favorite books) that the political enfranchisement after WW1 of very large segments of the population in Western democracies – most crucially the working classes, who historically bore most of the pain of adjustment – meant that the traditional adjustment mechanisms under the gold standard, which were deflation and rising unemployment, meant that we would never return to the gold standard. Politics would make it impossible (and probably a good thing, too).
The pain of adjusting
This has an important implication for the discussion on the euro. Unfortunately the euro today imposes a kind of gold standard on European countries – it forces them to adjust to excessively high domestic prices, large trade deficits, and/or large fiscal deficits in the same way they would have had to adjust under the gold standard, and I don’t think that is…
