Economists, particularly those in academia, do not currently have the best of reputations. A recent Guardian editorial asked, Why do we take economists so seriously?
"Why all this panic, though? Aren't economists in charge of it all? Yes. And this is the problem. These highly skilled people carry on, though they exhibit not only a lack of foresight but an astonishing lack of hindsight. Why on earth are they taken seriously when they keep getting things wrong?"
The view that economists have no foresight, are "in charge of it all," and got things terribly wrong is misguided, at best, when it comes to the current crisis in the euro zone.
A January, 2010, research article in the journal Econ Journal Watch found that the vast majority of U.S. academic economists believed that the formation of the euro zone was ill advised. The piece was titled, It can't happen, it's a bad idea, it won't last, after an earlier 2001 article that classified academic economists as falling into one of those three camps when it came to their opinion on the euro. The 2010 piece, which was written before the crisis in Europe, wonders why academic economists were so unreasonably skeptical about the euro:
"The main finding of our survey is that U.S. academic economists were mostly skeptical of the single currency in the 1990s... The pessimistic forecasts and scenarios of the U.S. academic economists in the 1990s have not materialized... [The euro] has not created political turmoil in Europe."
I imagine the position of the two authors has changed dramatically in the last two years.
Despite the objections of academic economists, the euro zone was created, the euro was introduced, and additional countries were later added to the currency block. During this period economists continued to be skeptical of the idea. In a Q&A session to the Bank of Canada over a decade ago, Milton Friedman was asked to give a prediction on the future of the euro. His reponse, in part:
"I hope it succeeds, but I have very low expectations for it. I think that differences are going to accumulate among the various countries and that non-synchronous shocks are going to affect them… the various countries in the euro are not a natural currency trading group…They need some kind of an adjustment mechanism to adjust to asynchronous shocks – and the floating exchange rate gave them one. They have no mechanism now."
This answer, given in the year 2000, was prescient. A financial crisis and housing bubble were non-synchronous in their effects on euro zone countries, with some countries being hit much harder than others. Normally in such a situation, currency devaluation through monetary policy would be used to return the economy back to health. But there is no monetary policy appropriate for both Spain and Germany, leaving the former with an unemployment rate over 24 per cent.
Of course, this does not mean that economists were completely correct about the euro. There was a vocal minority of academic economists who supported the idea. Mr. Friedman and others believed that a crisis and collapse of the euro zone would happen within 10 years of the formation of the euro; the timing of their predictions was off. And the euro is not dead yet; there is a small (but non-zero) chance that through further fiscal and financial integration the euro zone will become closer to an optimal currency area and be stronger for the experience.
Looking over the events of the last few years, we see that academic economists were, in fact, mostly right about the euro. The objections made by the profession were ignored and now the world is paying the price.
Mike Moffatt is an Assistant Professor in the Business, Economics and Public Policy (BEPP) group at the Richard Ivey School of Business – Western University. Mike also does private sector consulting for the chemical industry and can be found on Twitter athttps://twitter.com/#!/MikePMoffatt.