A childish take on the eurozone crisis

In the 1970's, a group of young professionals in Washington formed a baby-sitting co-operative. The way it worked was simple. Couples who wanted an evening out could call on other parents to look after their children. For every hour that one couple took care of another's babies, it would receive a coupon that entitled it to an hour of baby-sitting by other parents some time in the future. The system tried to ensure that, over time, each couple would provide as many hours of baby-sitting as it received in return. There is much that these arrangements can teach us about the eurozone crisis and policy-makers' response to it.

Consider the central features of a baby-sitting economy. First, its ultimate purpose is consumption. Couples do not sit babies because they want to collect coupons for their own sake. They do so to give themselves the opportunity to enjoy an evening out without their kids some time in the future. Second, too much individual virtue can be a collective vice. If everyone behaves too frugally and focuses on accumulating coupons, the system falters (because baby-sitting opportunities become increasingly scarce). Third, thrift and indulgence are flipsides of the same coin: no couple can earn baby-sitting coupons unless another goes out.

What relevance does all of this have to the eurozone's difficulties? In part, the eurozone is in crisis because demand for baby-sitting hours grew broadly in line with supply at eurozone level, but conspicuously failed to do so at national level. Between 1999 and 2008, the eurozone achieved tolerable growth in its 'gross baby-sitting product', but only because neurotic caution in parts of the region was offset by irresponsible revelry elsewhere. In effect, the thrifty forgot that collecting coupons was not the ultimate purpose of baby-sitting, while the profligates forgot they would eventually have to sit others' babies in return for their evenings out.

The main lesson that European policy-makers seem to be drawing from all of this is that the profligates must mend their ways. Some couples have had far too many evenings out, and need to spend more nights in looking after other parents' babies. So far, so uncontroversial. But the prudent want to go further. They want to introduce a system of penalties to encourage the emergence of a more puritanical region in which all couples spend more time sitting babies and less going out. As Angela Merkel has said, all eurozone countries must learn to run their economies as prudently as a Swabian housewife. This approach, however, makes little economic sense. A baby-sitting co-operative – or, for that matter, a more complex modern economy – is not like a Swabian household.

Nor should it be run like one. The reason, recall, is that too much individual prudence can be self defeating: the collective outcome of a surge in individual parsimony would be an increase in the number of stay-at-home couples wanting to collect baby-sitting coupons. Since one couple's evening out is another's chance to baby-sit, however, a generalised embrace of virtue would be recessionary: supply would be plentiful, while demand would be chronically weak.

In an economy, virtue cannot be universalised. If the erstwhile revellers are to start sitting babies, the prudent must start providing them with more opportunities to do so. The puritanical point out that since the eurozone is not an island, it is quite possible for the region to accumulate baby-sitting coupons with the rest of the world. The trouble is that Planet Earth is an island (so to speak). Until Earthlings are able to baby-sit for alien parents on Mars, they must make do with each other. And here's the rub: who do eurozone couples expect to provide them with baby-sitting opportunities? Asians are as cautious as Swabians, and Anglo-Saxons must start baby-sitting as urgently as Greeks and Spaniards.

What does all this mean for the reform of eurozone governance? To start with, it ought to be obvious that the demand side cannot be ignored. It makes little sense to exhort the irresponsible to mend their ways if opportunities to baby sit become ever scarcer. If, nonetheless, tougher penalties are introduced within the eurozone to discourage couples from going out, the unspoken assumption must be that baby-sitting opportunities will be provided by those outside the eurozone. In that case, however, eurozone policymakers must explain why they expect Asians to be less cautious than Europeans, or why they believe that Anglo-Saxons should continue behaving as recklessly as they have done over the past decade.