Here are my slides (pdf) from the talk I gave at the euro-crisis conference in Bayreuth, Germany in January 2012.
And here are some reflections upon that conference:
1) Heads in the sand
Most people said “The current route (internal devaluation) isn’t working” and also “nothing else is possible — especially external devaluation”.
2) Key disagreement
The key contention was between those who believed in a Keynesian / Eichengreen interpretation and those who didn’t. Two interesting things about this: (i.) The Keynesians think that by staying in the euro, illiberal outcomes will be courted (i.e. trade barriers, capital controls), and (ii.) The Keynesians came exclusively from non-Eurozone countries: UK, Switz and Sweden. The people most fiercely against the Keynesian ideas were from Germany and Greece.
3) Reflections
Interesting that EZ countries (Greece) have not yet suffered a “sudden stop” in the way that East Asia did upon its crisis or the indeed the Europeans did in their 1931 crisis. Instead, official financing is still bridging the gap. Which is analogous to the Argentina story, in the sense that IMF money bridged things over until that money was rejected/withdrawn.
“Liberalism”. I in particularly urged people to consider that by forcing countries to stay in the euro (or indeed “helping” them to stay in the euro), the result might be highly illiberal as countries are forced to adopt capital controls and/or trade barriers to countenance severe currency overvaluation with domestic reflation. After all, the polities are not going to stand recession forever. An interesting counterpoint was made by a Cyprus delegate at the conference: He thought that by allowing Greece (or Italy etc) to devalue, you take the pressure off of them to reform. In other words, only by staying in the euro to keep up the pressure on these government to reform and liberalise. Very interesting stuff either way. My own view is you have to do both: Keep up the pressure for reform, but do so in a growth environment, which absolutely requires an external devaluation.
Internal devaluation versus external devaluation. We had presentations from both Latvia and Estonia on their (generally successful) internal devaluations. Essentially, both presenters said: “Yes, we devalued internally, but you probably can’t.” Because only these countries have the motivation to succeed (ex-Soviet) and the lack of labour rigidities.