At the risk of having all of us walk out of class, Professor Jonathan Haskell showed this graph today and told us that this was a whole term’s worth of his Europe in the Global Economy class in one slide. Luckily for him, no one budged, but unlucky for us it is a little more complicated than that. However, this graph is a fascinating narrative about what happened in Europe from the formation of the European Monetary Union through today and helps one grasp just how we get into the debt situation we are in and why it’s only gotten worse.
What we discussed in class can be summarized like this:
Before the Euro: interest rates varied a lot
After joining the Euro: everyone’s interest rate fell because everyone thoug that different government bonds were equally safe. Low interest rates meant high aggregate demand–lots of investment, increased consumption, some increased government spending too
The crisis: asset price bubble bursts, consumption falls as does confidence. Interest rates return to being driven by individuacountries, with interest rates rising across the board, but especially in Southern European countries. This lowers investment.
Before the Euro, Southern European countries could depreciate their exchange rates. Now, the only safety value left is government spending.
For more reading on this topic, check out Profesor Haskel’s blog here.