While it was Raghuram Rajan’s piece that received the most attention, another note-worthy essay published in the May/June edition of Foreign Affairs is Andrew Moravcsik’s “Europe After the Crisis” (both are gated). Moravcsik’s article is a pretty good overview of the European dilemma which has unfolded as a result of the recent recession, but it is difficult to agree with the policy prescriptions.
I thought mercantilism, for the most part, was discredited by the past two hundred and fifty years of economic thought. But, Moravcsik suggests — and he is serious — for Germany and debt-heavy European member states (e.g. Greece, Italy, Spain, Portugal, et cetera) to meet halfway, so to speak. Indeed, apart from heavy currency devaluation (which, I admit, is not so controversial for most), he argues that Germany ought to raise real wages and increase public spending (the last part I understand least of all — what is the relationship between public spending and parity on trade terms between different European countries?).
I would have thought much more acceptable to instead push debt-ridden states to become more competitive, instead of forcing Germany to become less competitive. It is true that, partially, Moravcsik is discussing it as a short-term solution, but the true short-term solution should be structural readjustment that will allow other European countries to gain competitive advantages. After two hundred years, the worst of mercantilism has not died.