The Euro Zone Has Failed

http://online.wsj.com/article/SB10001424052748704875604575280452365548866.html?mod=WSJEUROPE_hps_MIDDLETopStories

by binjip3 • 16 years ago

28 17 16 years ago

online.wsj.com

anigbrowl4• 16 years ago

Czech bounces, bank not happy.

Basically Mr Klaus, president of the Czech republic, defend his country's non-adoption of the euro because it has left him free to use the traditional method of dealing with recession by loosening monetary policy - with a lower exchange rate for their currency, their exports look cheaper to foreign buyers, and imports are more expensive for residents. This brings in more money (in a harder currency), keeps more of that money in the domestic economy, and also allows the government to inflate away some domestic debt as the economy improves by raising interest rates.

None of these options are available to euro members, any more than they are to individual US states. So to repair their state balance sheets in a federal monetary environment, they must make politically unpalatable like raising taxes or cutting services, and don't have much flexibility in terms of repricing their external trade. That means pissy voters and a somewhat slower recovery, because trade gains must come from either reductions in base costs or improvements in quality, both of which are harder to realize than to talk about.

On the other hand, these latter things represent fundamental economic improvements, whereas currency revaluation is something of a sleight-of-hand that taxes people indirectly and leads to inflation. But for a politician, that's highly preferable to telling the voters that they are likely to get less and pay more. So, less fun and freedom for euro-zone politicians who have to implement austerity programs and persuade their electorate to deal with financial reality, but (in my opinion) better for their economies over the longer term, as they'll make needed reforms while the Czech Republic and Poland only go through the motions of doing so and carry forward their structural problems.

Sorry that 'summary' is so long - not much of a time saving :-/

jayruy4• 16 years ago

Great summary - I'm with you right up to the point where you think less monetary freedom is actually good because it will force the Eurozone to "tighten its belt". Miracles do happen, but just consider the political animosity already bubbling up in the richest and poorest countries.

Politicians will give the "belt tightening" bit a try; no one wants to be seen as acting in bad-faith towards European solidarity, but as soon as their electorate bubbles over it's peace out. Either the richest few or poorest few countries will drop out of the Euro; I'd be extremely surprised if it maintains the composition of today.

anigbrowl4• 16 years ago

For sure. I'm actually more of a Keynesian (ie a believer in financial stimulus during a crunch even if it means a temporary loosening of monetary policy) but obviously as soon as growth has returned that creates the responsibility to start paying off the resulting debt. I'm a little more optimistic than you about the cohesion of the euro, but only a little, sad to say.

binjip3• 16 years ago

Thanks a million for your summary.

I completely agree with you that it's better for the economies in the long run to implement austerity programs than just inflate the money base (I guess Germany is a pretty good example). At the same time, the current situation with 16 euro zone countries with very different economic needs doesn't seem optimal.

For once, the price mechanism that maintains efficiency is now basically broken. If Greece had it's own currency, market forces would have pushed the value of Greek currency down, thus making exports cheaper. Now, of course, independent Greece central bank would likely try to inflate the currency if it had the chance, but this is now happening anyway with the ECB lending to banks at artificially low rates.

So as I see it, it would be best to have an own currency which is allowed to float AND a strong independent central bank that won't succumb to political pressure and that will force the politician to implement austerity programs. Welcome to Utopia.

anigbrowl4• 16 years ago

Well, the US manages it with 50 states, and China, India, Russia and a few other countries historically have multiple economically disparate regions that share a single currency. But in those cases you have a largely undisputed central authority with direct tax-raising powers. The EU can't levy taxes directly and national governments love to simultaneously assert their influence upon, procurement of funds from, and the financial tyranny of the the EU as a federal entity.

It's like one of those parties that everyone is desperate to be invited to so they can then stand around talking about the much cooler party they would have gone to instead, if they had known it was going to be like this. Few european politicians are really honest with their electorates about the practicalities of economic or political federalism. Of course, it doesn't help when there are so many different languages in use, which makes it very hard to cultivate any kind of pan-European political consensus.

TomOfTTB• 16 years ago

I don't disagree with your summary of the situation but I don't think you portray the point of the article correctly which essentially boils down to this sentence...

"During its first 10 years, the euro zone has not led to any measurable homogenization of its member states' economies."

The real question isn't "is there a benefit to having a common currency" because everyone knows there is. That's simply logic (the money saved in currency conversion alone makes the point self-evident). I don't think he's disagreeing with that.

The issue he's raising is whether these disparate nations can maintain their independence as nations while becoming one homogenized economy. Because political decisions (like over spending on a social safety net) have an impact on an economy and on the worth of that economy's currency.

That's the point he's making. He's saying economic realities rely on political decisions and nations can't be politically independent while being completely dependent on each other economically

jacquesm3• 16 years ago

One reason why there has not been much progress towards homogenization is that there is a lot of paperwork involved in intra-community trading.

The local tax entities are paranoid about potentially missing out on some VAT and the rules for getting your VAT back border on the insane, effectively this causes businesses to prefer to do business with others in the same region.

Paperwork can be a very effective barrier to trade. So because only the larger companies are used to dealing with the paperwork the smaller companies which could 'knit' together the member states at the borders are not engaged, which in turn stops the market from really working well and homogenizing the economies to the point where it no longer matters where you do business.

jayruy4• 16 years ago

This is misguided: there is a definite cost/benefit tradeoff in having a common currency. Common currency means no independent central banks, which could use monetary policy to devalue independent currency and stimulate exports. Not having the ability to do this puts these countries at a serious disadvantage in a recession.

bwanab• 16 years ago

All that you say is correct. However, I would like to mention that motivation for the euro was at least as much economic as political. Many companies in Europe have means of production that span several countries. Having a stable currency across those countries decreases their uncertainty which certainly increases their willingness to invest. Vaclav Klaus is correct in his diagnosis of the problems with a single currency - this is nothing new - Jane Jacobs described everything he said in his article more than 30 years ago in her book "Cities and the wealth of nations".

He is incorrect in that he ignores the motivations behind the euro. Americans, of which I'm one, should try to imagine a world in which a company in New York that has a supplier in New Jersey would have to hedge their future payments to account for potential currency fluctuations. While the cost of currency hedging has decreased in the past twenty years, it is still a significant business driver. Not one of my European friends and colleagues believes that the end of the Euro would be a good thing.

On the other hand, I'm not so sure that currency revaluation always represents a sleight-of-hand. It can and often does, but at it's best it forms an immediate positive feedback that the balance of accounts between two countries with different currencies have become out of line. What the world needs is a feedback mechanism as immediate and accurate as currency fluctuation that doesn't impose the kind of economic risk to individual economic entities within those countries - plus, what you said above about politicians and voters.

Sorry, again tl;dr.

tptacek• 16 years ago

Please fix this headline, which currently reads (in its entirety) "tl;dr. Anyone?". The first 5-or-so submission guidelines (see link below) are about how to title articles here.

coderdude• 16 years ago

It really, really bothers me when people use "tl;dr" on HN. I see it more and more each day as people cross-over from Reddit (or worse, Digg) to this site. I feel like every time I see it I have to train them to not. I would be tickled pink if there was a filter that would auto-remove such comments and submissions from this site. It encourages and enables laziness, which is something this community does not need.

Edit: This was about the previous title to this submission. The submitter fixed it.

anigbrowl4• 16 years ago

I like it. I can generally tell from a tl;dr summary whether the original material was interesting and/or whether it has been fairly summarized.

jacquesm3• 16 years ago

No, you can tell whether the person making the comment was lazy or not, it won't tell you anything about the original material unless you read that too to verify the summary was correct.

And it definitely isn't a rule that they are.

wazoox• 16 years ago

It's not unusual to see such a predictably right-wing rant on the wsj. I particularly appreciate the long rant on the ill-guided european "social system" that bogged us down since "the 60s". Hu. Only ex-stalinists can be such free-trade retards.

BTW I know most HN readers adhere to these views (that in europe are extremely right-wing) and I'm systematically downvoted because I'm a proud socialist :)

The Euro Zone Has Failed

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