Greenspan: South Must Follow North for Euro to Survive

The euro zone is likely to need political unification to bridge the differences between the profligate south and the prudent north in order to save the euro, Alan Greenspan, former chairman of the US Federal Reserve, wrote in an opinion piece in the Financial Times.

Alan Greenspan
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Alan Greenspan

"It seems inevitable that for the euro to prevail, something more formidable than the failed stability and growth pact is needed to constrain aberrant behavior," Greenspan wrote. "It may be that nothing short of a politically united euro zone, or Europe, will, in the end, be seen as the only way to embrace the valued single currency."

The crisis in the euro zone is not just one of debt but one of culture, as the burden is mainly on southern Europe, while northern countries' spreads against Germany are tight, he argued.

"If the euro is to remain a viable currency across the euro zone, members must behave in the responsible manner contemplated in the Maastricht treaty. But it is not clear that culture, so integral to a nation’s personality, can be easily altered," Greenspan wrote.

Looking at credit risk spreads by size across the euro zone last year, it can be seen that their ranking was almost identical to the ranking of the level of labor costs, and this suggests that higher labor costs and prices made the southern countries less competitive and therefore more subject to risk, he wrote.

Greenspan also said that there had been a continuous net transfer of goods and services from the north to the south between the creation of the euro in 1999 and the first quarter of 2011, with northern Europe effectively "subsidizing southern European consumption from the onset of the euro on January 1, 1999."

"Subsidized borrowing may have accounted for much of the acceleration in the ratio of euro-south consumption relative to that of Germany," he added.

The northern states, historically, had high savings rates and low inflation, because their culture emphasizes longer-term investment rather than consumption, while Greece and Portugal, for instance, have had negative saving rates indicating excess consumption since 2003, the former Fed chairman explained.

"There remains the question of whether most, or all, of the south would ever voluntarily adopt northern prudence," Greenspan wrote. "The future of the euro beyond a select group of northern countries with a similar culture will depend on the ability of all euro zone nations to follow suit."