WASHINGTON, Jan. 9 (UPI) -- Side by side the stories appeared for most of the last week: the launch of the Euro, establishing a new single currency for the European Union, and the ending of the fixed link between the Argentine peso and the U.S. dollar. Day after day there were glowing stories of how the Europeans were lining up to exchange their francs and lira for Euros in a historic new step toward European unity. In the same papers, often on the same pages, there were horrifying accounts of how the Argentines were seeking vainly to get their hands on dollars before the peso was officially devalued and their savings cut by almost a third.
One set of stories described the optimistic birth of a new currency union; the other the humiliating collapse of an earlier one. Yet scarcely a report made the obvious connection between these two events. A trawl through the early accounts discovered one modest warning reference by Andrew Sullivan in the London Sunday Times to the Argentine disaster as a sign that the Euro might not necessarily succeed. Otherwise Europe's glorious future was quite unsullied by Argentina's collapsing present.
What was going on?
Well, it is sadly possible that some reporters may not have realized that there was a connection. Though the Argentine crisis began as a currency problem (aggravated, to be sure, by excessive government spending), it quickly became a political and constitutional crisis with rioting in the streets and five presidents succeeding each other within two weeks.
As presidents fell like ninepins, moreover, the historians appeared on op-ed pages to remind us that Latin America's conversion to democracy, free markets and fiscal responsibility was very recent-and, so to speak, unstable. We should not be too surprised at Argentina's reversion to inflation, debt default and political upheaval. It was deeply imprinted in the national psyche and would not be overcome easily.
By the end of last week, some U.S. political correspondents finally discerned at least one wider lesson: President Bush's plans for a continent-wide economic bloc, the Free Trade Area of the Americas, had taken a knock. For the Argentine collapse was being blamed by many people, including Argentinian voters, on the nation's conversion to free markets and free trade rather than on the collapse of its un-free, fixed-price currency. So they would probably be reluctant to swallow more free-market medicine-and so might their neighbors.
In short, there was so much going on that many people forgot the root of the crisis: namely that the Argentine currency board, by taking on the obligation to exchange one dollar for one peso, was compelled to raise interest rates to the point where it inflicted a seemingly endless recession on the economy.
Yes, this was made worse by excessive government spending. But the basic problem was the Argentina's monetary policy and exchange rate were in effect set by the U.S. Federal Reserve. And as the serious economic commentators finally arrived (late in the economic cycle) to point out in their weekly columns, this meant that Argentina was unable to use these economic weapons to deal with the nation's problems.
Thus, the U.S. economist Irwin Stelzer in the London Sunday Times: ". . . the authorities were helpless when Argentina's principal trading partiner, Brazil, devalued its currency. The overvalued peso made it impossible for exporters to hold onto markets, forcing factories to close and unemployment to top 20 per cent." Not long afterwards, it also led to riots and revolution.
Which is where the euro comes in. As columnists like Stelzer and William Rees-Mogg in the London Times pointed out, the euro is an Argentine currency board on a much larger scale, uniting the currencies of 12 European nations from Finland to Sicily. This currency union also has a "one-size-fits-all" monetary policy on the Argentine model. Which means that no monetary policy set by the European Central Bank can possibly suit both Germany (whose economy is faltering and needs the boost of low interest rates) and Spain (which is inflating and needs the correction of higher ones.)
In the United States, we solve or at least ameliorate this problem of regional economic variations by labor mobility. When California hits a slump, some workers uproot themselves to move to the job opportunities in a part of the U.S. that is booming. In some of the individual European nations now in Euroland, they have traditionally responded with regional cross-subsidies, taxing the booming North of Italy to finance grants to the depressed Mezzogiorno. And so on.
But the European Union can resort to neither remedy to the degree necessary: Germans are unlikely to move to Spain in the numbers that would restore equilibrium in both countries; and Italians are even less likely to vote for large subsidies to Greece or Belgium. Because America is a nation as well as a currency union, its people are prepared to make these kind of sacrifices for each other in hard times; because Euroland is a collection of different nations in a monetary straitjacket, its peoples see no reason to bail out their neighbors from troubles they darkly suspect may be well-deserved.
What this ultimately threatens is that Euroland, like Argentina, will be rocked by perennial crises, with inflation in one country, long-running joblessness in another, and instability everywhere.
Journalists are supposed to notice that kind of possibility. Why did they not do so?
Most reporters lack passionate opinions on exchange rate mechanisms. They do not root for the crawling peg, nor abhor "the snake in the tunnel." So the celebratory tone of most coverage-which concentrated either on the sheer excitement of the launch or on the "historic" nature of the event-is best explained as an expression of elite conformity.
Conventionally-minded bankers, politicians, corporate officers, foundation executives and Ivy League reporters all know-without ever having really thought about the matter-that the European Union is a Good Thing. And, by extension, the euro is a Good Thing too, a step forward, you know, historic, an insurance against future European wars, the fulfillment of an idealistic dream, that kind of thing.
The collapse of the same dream next door did not suit that scenario. To draw attention to it might have seemed grudging, or party-pooping, or anti-European, or the vulgar triumphalism of an American provincial. So it was passed over in discreet silence.
In the case of the Wall Street Journal editorial page, the explanation is somewhat different, perfectly clear, and above board. Those who labor on its editorials are dedicated in principle to the euro, the concept of currency boards, currency unions, and other "hard" versions of fixed rates and so they are reluctant to suggest that such mechanisms might be fatally flawed.
Tuesday's WSJ editorial was a gallant attempt to rescue something from the Argentine conflagration by arguing that all would have been well if the government had lived within its currency discipline, if it had avoided overspending, and if Brazil had not devalued.
True enough -- and all would be well with any currency system if the government in question accepted its discipline and lived within its means and if the economy did not experience any external shocks. It is also true that if men were angels, the earth would be a little bit of heaven. They're not and it isn't.
This leaves the WSJ firmly on the hook, however, because its case against flexible exchange rates was that they permitted government laxity even if they successfully accommodated to external shocks whereas a currency board would be a firm discipline both restraining government spending and compelling the economy to adjust to external shocks with downward flexibility of labor and other costs.
"Oh well," as the airplane designer says as he surveys the crashed prototype in the Peter Arno cartoon, "back to the drawing board."
