So long, euro?

http://www.economist.com/blogs/freeexchange/2010/04/european_crisis

by cwan • 16 years ago

54 75 16 years ago

roboneal5• 16 years ago

Ultimately, the "euro" experiment is doomed to failure. You can't have a unified currency and monetary policy, while individual countries have massively different domestic spending policies.

hugh3• 16 years ago

Right, so the EU powers that be have two options:

1. Admit they were wrong and dismantle the Euro, or

2. Use it as an excuse to centralise more power in Brussels, "harmonising" the spending policies of the various member nations

Which do you think they'll pick?

gaius• 16 years ago

The problem isn't the spending policy, tho'.

Go to Athens and you will see the problem very clearly. The habour is full of yachts, the streets are jammed with luxury cars and the people covered in designer labels and bling. This is a wealthy place, you might think, then look at little closer. The place looks like a building site and here's why: in Greece you pay no taxes on a building 'til it's completed, but since the weather is fine all year anyway, why not just leave the top floor unfinished? And they do, private individuals and corporations alike.

You see, the Greeks want a level of government spending like Germany or Sweden. They're even willing to vote in the taxes to fund it. But they're not willing to actually pay those taxes, and so they just don't. Greece is a poor country full of rich people. In that sense the austerity measures will be easy to implement: corruption is everywhere. As is a strong sense of entitlement... Compare that to Germany or Sweden where paying your tax is seen as a civic duty.

I did quite like the German idea that the Greeks ought to sell off their islands to other countries to raise cash.

fab13n4• 16 years ago

Yep, Europe has set itself up in a situation where sooner or later, it'll have to get a unified economic policy. But it doesn't look like a bad thing to me:

* European countries are too small to be meaningful in worldwide economic (or military) matters: our markets would be too atomized, we wouldn't have any negotiation power unless we "harmonize" our positions: I'd rather have the decisions be taken together, rather than harmonized as an afterthought.

* Granted, today Brussels doesn't work democratically and lacks real power, especially when it comes to monetary policy. Giving real power to that shapeless bureaucracy seems stupid at first sight. For European elections, most parties are attached to a single country, have "national" (i.e. totally off-topic and inapplicable) programs, aren't kept accountable for anything once elected; the vast majority of voters either don't have a clue what a Euro-MP's purpose is, or would bet that they have none.

But all of this would change quite rapidly, if Brussels was to get some real, strategic, intelligible power: real programs would become defensible during elections, the purpose of real pan-European parties would become clear, and if elected people ran on a real program, they could be held accountable of it (well, at least as much as in normal democraties anyway).

sailormoon2• 16 years ago

You can use the exact same argument to say the US federalism "experiment is doomed to failure".

Actually, I wrote that with the intention of disagreement, but now I think about it ...

eru11• 16 years ago

The US has probably greater fiscal transfers between states and the federal budget is bigger than the EU budget compared to the member states' budgets.

conover• 16 years ago

But the big difference is that US states (redundant?) must run a balanced budget.

eru11• 16 years ago

Why do you think so?

What odds would you offer on common monetary policy in the EU falling apart first vs common monetary policy in the US and China falling apart first? (China and other countries are copying US policy, by pegging the exchange rate. They should fail soon, too, by the same logic.)

roboneal5• 16 years ago

>> Why you think so?

While China may have pegged it's exchange rate to the U.S. , it has the power to decouple at any time to adjust to changing market conditions.

Greece (and soon Portugal, Spain, & Italy) don't have that ability. What can they do? - beg for a bailout or exit the EURO and devalue their currency.

I guess there is a third option - dramatically cut SPENDING and entitlements.

henryprecheur2• 16 years ago

Being unable to devalue the currency (print money to pay debt), is --I think-- a good thing. It is harder for politicians to postpone the pain, they have to cut spending and do what's needed for the country/state/province to recover fiscally.

If somebody weights 200kg: The right solution is to lose weight and eat your vegetables; not to "devalue" the Kilogram.

roboneal5• 16 years ago

But are politicians in Greece cutting spending? All I see are nationwide strikes protesting proposed cuts.

It's more likely they will be bailed out by the more fiscally sound countries.

cynicalkane2• 16 years ago

Another way to lose weight would be to starve to death, which is what happened to many people the last time the Fed refused to devalue the currency (1929-1933).

nickpinkston• 16 years ago

The real economics at work here are the economies of scale that comes with being the reserve currency of the world. Whoever owns the reserve currency holds the keys to the global economy - they're not backing anytime soon. Some say it could be 2022 when the Euro > Dollar.

PDF: http://www.ssc.wisc.edu/econ/archive/wp2006-01.pdf

cabalamat2• 16 years ago

> You can't have a unified currency and monetary policy, while individual countries have massively different domestic spending policies.

This is factually incorrect, because for over 1000 years European currencies were backed by silver or gold and were thus the same, despite the fact that European polities had vastly different spending priorities and indeed levels of development.

cynicalkane2• 16 years ago

The GP meant not that it's physically impossible, but rather that it is a bad idea.

(I'd rather not get into an argument about the gold standard; except to say that almost every economist that matters thinks it is a bad idea.)

roboneal5• 16 years ago

You may need to brush up on the history of currency. So called "gold and silver" standards did not eliminate fluctuating exchange rates and valuation/devaluation cycles.

For example:

"In 1663, a new gold coinage was introduced based on the 22 carat fine guinea. Fixed in weight at 44½ to the troy pound from 1670, this coin's value varied considerably until 1717, when it was fixed at 21 shillings (21/-, 1.05 pounds). However, despite the efforts of Sir Isaac Newton, Master of the Mint, to reduce the guinea's value, this valuation overvalued gold relative to silver when compared to the valuations in other European countries"

http://en.wikipedia.org/wiki/Pound_sterling#Gold_standard

So even in physical coin form, this only worsened with introduction of paper notes, individual currencies fluctuated in valuation from country to country.

Thus, European currencies historically were not "the same".

timr• 16 years ago

You could also reasonably argue that the US is a perfect example of what the OP thinks is impossible. The primary differences are that we have a far more mobile workforce than does Europe, we have effective caps on state debt levels, and we have a (much hated) unified tax system that allows federal tax money to be spent in states that are lagging economically. Despite conservative hatred of these latter two items, they have done a lot to keep us from going through Greek debt crises of our own.

Keyframe• 16 years ago

More of a temporary setback and more centralized decisions and restrictions in the future. I really can't see anything not normal happening for a new currency/"government in the making" on the block.

wtn3• 16 years ago

You may see this as a "normal" transition period but that doesn't mean EMU will survive intact. Sovereign debt crises (plural) and bank solvency are huge problems for several EMU states.

If one EMU state defaults on sovereign debt, there will be a chain reaction in the banking system and the debt markets. Several states are at risk of defaulting.

The politics remain highly unpredictable.

rue• 16 years ago

So long, Euro? No. Seriously?

Meanwhile, in reality, it was about time for the euro to come down against the dollar. Macroeconomically too, of course, but on a personal level a ~10% effective gross wage increase (or reversal of decrease to be precise) is quite alright with me.

jackfoxy• 16 years ago

If anything has been learned from the past decade's ramping up and unwinding of the Collateralized Debt Obligations (and related matters), it's that today's politicians and technocrats have taken leave of the notion of moral hazard, as if they could repeal it. Until moral hazard comes back into vogue, I fear the sky is the limit for the bad things that can happen because the game will always be to act in your short term interest before the next guy does.

wtn3• 16 years ago

Very true. Reminds me of this email I got recently from my brokerage:

While the Fed is lending money at almost zero interest rates, why not take advantage of it through <brokerage name>? <Your broker> will lend up to $566,000 at 1.25% for every $100,000 in a Portfolio Margin4 Securities Trading account. As of 4/5/2010, more than 500 stocks had a dividend yield of 5% or more.

jrockway2• 16 years ago

Your broker just buys a CDS on you, and then when you default, they get their money and whatever stock you bought. And since most people don't default, the bank that issued the CDS makes money too.

Playing numbers games helps everyone grow their capital. You just have to do it intelligently.

patrickgzill• 16 years ago

Anecdotal evidence (i.e. a friend who knows someone in Greece) is that Greeks are lining up at banks to withdraw all their funds, i.e. a classic bank run is now in progress.

steveplace2• 16 years ago

When I see headlines like this I think "So, long euro."

eru11• 16 years ago

Being contrarian can be profitable. Are you willing to put your money where your mouth is?

steveplace2• 16 years ago

I traded the euro (6E futures) long yesterday, so yes.

So long, euro?

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