Who Warned About the Euro First?

The Wall Street Journal, July 23, 2012. Copyright © 2012 Dow Jones & Company, Inc. All Rights Reserved.

As the world’s financial markets begin to price in a total collapse of the euro project, there’s no shortage of economists and other experts saying they always knew it was doomed to failure. So who warned first?

Well, only last week, a senior International Monetary Fund economist resigned and wrote a scathing letter to the board blaming management for suppressing staff warnings about the 2008 global financial crisis and for an alleged pro-European bias that he says exacerbated the euro-zone’s debt turmoil.

But long before the 2008 crisis, many economists were warning there were structural problems in the euro set up. And now the Levy Economics Institute of Bard College has issued a policy note, provocatively headed “Euroland’s Original Sin,” which names five of them.

There’s Stephanie Bell, writing as long ago as 2002, who warned that “the prospects for stabilization in the euro zone appear grim.”

And the year before that, back in 2001, Warren Mosler wrote that history and logic dictate that the credit sensitive euro-12 national governments and banking system will be tested.

“The market’s arrows will inflict an initially narrow liquidity crisis, which will immediately infect and rapidly arrest the entire euro payments system,” he said. “Only the inevitable, currently prohibited, direct intervention of the ECB will be capable of performing the resurrection, and from the ashes of that fallen flaming star an immortal sovereign currency will no doubt emerge.”

But two years before that Mathew Forstater was highlighting the problem that “market forces can demand pro-cyclical fiscal policy during a recession, compounding recessionary influences.”

Even earlier, in 1998, L. Randall Wray was concerned that the euro zone would be much like a U.S. operating with a Fed, but with only individual state treasuries. It will be as if each member country were to attempt to operate fiscal policy in a foreign currency; deficit spending will require borrowing in that foreign currency according to the dictates of private markets, he said.

And the winner? According to the Levy Institute, that was Wynne Godley, as far back as 1997, who wrote: “The danger … is that the budgetary restraint to which governments are individually committed will impart a disinflationary bias that locks Europe as a whole into a depression it is powerless to lift.”

Mind you, there were plenty of others not named by the Levy Institute. According to Public Service Europe, in the late 1990s, eminent economists queued up to explain the flaws in the euro project. Chief among them was Nobel Prize winner Milton Friedman, who in 1999—the year the euro was born—predicted that “sooner or later, when the global economy hits a real bump, Europe’s internal contradictions will tear it apart.”

With Spanish bond yields surging while the euro and European stock prices tumble as the euro system creaks under austerity programs that have been imposed on governments that seem unable to cope with them, the words of Godley, Friedman and the rest echo through the years.

But were they the first economists to issue warnings? You may know better.