[MUSIC] What does a country do when it goes into crisis? Well, we saw in the United States and Japan that the country used expansive fiscal, expansive monetary policy to try to bring their economies out of the recession and the recessionary gap that followed. In the Eurozone, the countries that have joined the single currency, this is not possible, or at least not all of it. Because when a country joins the Eurozone, they give up two of their four policy tools. Remember that every country has four policy tools. There's fiscal, monetary, exchange rate, and structural. And when a country joins the Euro, they give up monetary policy, they give up exchange rate policy. So those were out, all right? Those are exercised at an EU level, okay? There would be a single monetary policy for all countries and a single exchange rate for all countries. So countries are left with fiscal and structural policy. But even in the area of fiscal policy, as the crisis persisted and countries' deficits got bigger, as we know is natural. The Eurozone, the leaders of Europe instructed companies to control those deficits and debts. So they did not have full use of their fiscal policy, as we'll see. So maybe they could have hoped that some help would come from the European level. Now, it's true that the European Union, or the Eurozone, brought down interest rates sharply to try to help countries get out of the crisis. But there are two other things that economists think would also be very useful for countries that have a single currency, like the Eurozone, and that would be for them to have fiscal transfers going across borders. In other words, countries that are doing well transfer money to countries that are not doing well to help pick them up. And countries that are doing poorly send workers across the border looking for jobs to countries that are doing well. So unemployment is alleviated in the countries that are doing worst, and the countries that are doing well help the countries that are doing the worst a bit with their government spending. Help them to be able to spend a little bit more and pick up the economy. Do these two mechanisms work in the Eurozone? Well, the first one, which would be the fiscal transfers across borders, as I've said, should mean that money's flowing from richer states, or ones that are doing better, to poorer states, or ones who are doing worse. This particular slide shows you the current situation. There are countries on the left who have higher GDPs per capita relative to the average, and lower GDPs per capita relative to the average. You can see who they are. And on the right, you can see whether those countries are paying into the European budget more than they receive, or whether they're receiving from the European budget more than they pay. And up at the top, things look about right. You can see that the richer countries are paying more than they receive, and the poorer countries are receiving more then they pay. But I want you to notice how small those transfers are. For the richer countries in Europe, those fiscal transfers to poorer countries, amount to less than 1% of GDP per year. How does this work in a country which has been a monetary union for a long time like the United States, one that's very diverse like Europe? Well, we can see that the physical transfers are much, much bigger in the United States. In fact, this graph shows that there are regions, there are states, like Mississippi or New Mexico, that receive amounts that up to 8% of their GDP, which can really make a difference. If you're in crisis and 8% of your GDP flows in from other regions, this helps you to increase public spending and pull yourself out. At the same time, there are countries that are doing well, these are at the bottom of the chart, like Connecticut, that transfer also a large amount of their GDP, much more than the less than 1% we were seeing in Europe. And that helps equalize these countries and also to smooth out their business cycles. How can the country make this work? Wouldn't it be unpopular for you to take taxes away from Connecticut and give them to Mississippi? Well, the way that it works so smoothly in the United States is that most taxes are paid to the federal government, to Washington. And therefore, Washington, as it administers the social programs which it also administers, it simply takes the tax money from certain individuals in the country and sends it to other individuals in the country who need it. Therefore, it's not explicitly a transfer from Connecticut to Mississippi. It's a transfer to the richest people in the United States to the poorest people in the United States, who just might happen to be many of one group in Connecticut and many of another group in Mississippi. In Europe, this is harder to do because on the right hand side of this graph, you can observe that the Europeans actually pay very, very little of their total tax to the EU government. They pay most of it to their national government, and only about 1% of GDP goes to the EU. That means that the EU has a very small amount of money to administer, to transfer among states. And of course the process of transfer is always politically charged, because this is money Germany has sent in, and the EU has to explicitly decide that that money now goes to Spain. As we mentioned, another mechanism that would make a crisis last less time, that would help alleviate a crisis in different regions that belong to the same currency would be if labor moved freely across the borders. In other words, we'll be looking at Spain in a moment and we will see that its unemployment rate went about 25%, in the crisis. Wouldn't it have been helpful if many of those unemployed Spaniards could've flowed across the border in to Germany where unemployment rates were low and found jobs there? But in Europe, those movements just don't happen. This chart shows how labor mobility in the United States from state to state is about 2.3% of the population every year, whereas in Europe, between countries is only about 0.2% of the population in any given year. In fact, Europeans don't even move within their own country, so the last bar on right shows the mobility of people from one region of a single European country to another region in a given year, and that's only 1%. So obviously, the free movement of labor within Europe is much less in the United States, and it's not enough to help countries overcome these, what we would call asymmetric shocks. If Spain is sunk into a recession and Germany is doing better, there are not enough Spaniards flowing to Germany to help alleviate Spain's unemployment problem and pick them up out of the crisis. [MUSIC]
