Europe’s Stealth Bailout

While Europeans debate the pros and cons of bailing out Greece, a bailout already is taking place under their very noses thanks to the declining euro.

By helping to increase Greek exports, the slumping euro is providing Greece’s budgetary authorities the wherewithal for increasing tax revenues necessary for fiscal consolidation.

So far, the crisis has caused a decline of almost 15 percent in the euro’s value against the U.S. dollar, and more may be coming. By sparking a badly-needed correction for an over-valued currency, the crisis has created its own solution.

The euro’s fall is being welcomed in all the euro-zone capitals — Athens as well as Berlin, Paris and Madrid. If the Germans could not tolerate the euro at $1.50, pity the poor Greeks and other less competitive euro-zone economies.

What the current crisis makes clear is that given the euro zone’s soft underbelly, Europe can not long tolerate a strong euro without fracturing. So long as inflationary expectations in the euro zone remain subdued, a “bailout by the euro” will not pit European against European (unlike a conventional bailout, where it is the Germans who pay). But what the falling euro does do is pit Europeans against Americans.

Whatever blame the Greeks themselves must bear for the current crisis — and obviously they bear a lot with their creative public accounting and such — the ultimate “credit” for it must go to the United States for its conscious policy of devaluing the dollar to promote U.S. jobs in the export sector.

The collateral damage from the American “beggar my neighbor” policy of dollar devaluation — which last year sent the euro skyrocketing to severely over-valued levels — has been a fractured Europe. This is an exorbitant cost for Europe to bear.

Now that the euro is correcting from its overbought position — and is likely to continue to correct under the weight of European fiscal consolidation — the question becomes how long the Americans will be willing to tolerate the dollar’s ascent before protesting.

The answer depends on the U.S. labor market. If the unemployment rate remains at about the 10 percent level, the United States can be counted upon to protest before long. But if the U.S. labor market improves and unemployment drops to, say, 9 percent, look for the U.S. to go from “beggar my neighbor” to “benign neglect” as far as the dollar’s value is concerned. This will be a blessing for Europe.

Crises can be constructive because, politically, they make possible the type of reform that would be impossible in more normal periods. The euro is selling off not because there is a crisis per se, but because markets are anticipating the fiscal consolidation (facilitated by the crisis) that will have to take place for Europe to right itself.

By its nature, fiscal consolidation suppresses the domestic economy. The more the euro declines, the less painful fiscal consolidation will be. This applies not only to Greece, but throughout the euro zone. Europe should not waste its Greek crisis. It should quickly get to work on fiscal consolidation.

Melvyn Krauss, emeritus professor of economics at New York University and emeritus senior fellow at the Hoover Institution, Stanford University.