Sunday, 24 July 2011

On the Euro

In light of recent events, I figured I'd do a blog about the rather silly business of the Euro.

Firstly let me start of by saying that a shared currency isn't always necessarily a bad thing, it's just that the Euro expanded over too wide and economically diverse an area. I could completely see the argument for a United BeNeLux currency or the creation of an Iberian Dollar as these are smaller areas enabling for the benefits of easier trade without creating the problems of having to attempt a one size fits all approach to monetary policy across an entire continent, the problems of which are being experienced in Greece and Ireland and will be experienced again next time there is a major recession.

Those who say that the collapse of the Euro would have major negative effects for both the Eurozone and Britain are of course correct, I'm not going to lie about that as it would be silly, but in the long run its better for everyone if the currency is ditched and national currencies/regional currencies are (re)instated. This would allow for monetary policy to be tailored to the specific economies as well as hopefully shaking of the disturbing trend in the activities of the EU. This trend is the way that many seem to think that prefixing something with "European" automatically makes it a good thing regardless of the actual facts, similar to how in Maoist China "redness" was seen as more important than being productive or efficient.

Despite the fact it would be better for everyone in the long run, the Eurozone won't collapse, as too many powerful people have too much political capital invested in the idea that the European Union is the solution to every policy objective and so German taxes will continue to prop up Greece, then Spain, Italy and Portugal. However I would say that even if the Euro does survive, then I would advocate them trimming the fat, by which I refer to the PIGS. (Portugal, Italy, Greece and Spain, not actual pigs, although the actual EU farming policy is in dire need of reform, but that is an issue for a different blog.)

However I must concede that now is probably not the best time for either a dismantling, or at least trimming the membership of, the Euro and that waiting until the global economy has stabilised is preferable.

So in summary what they should do is start planning for the abolition of the Euro, with an aim to do it once the global economy is stable, if however they don't want to do that then they should at the very least cut the membership down, its better for everyone if Portugal, Spain, Italy and Greece revert to the Escudo, Peseta, Lira and Drachma respectively, and would you believe I only had to look one of those up? (It was the Portugese one)

No topical quote today, I couldn't find a decent one on the Euro. So here is something completely different.

And I feel just like Sigourney Weaver when she had to kill those aliens and one guy tried to get them back to the earth and she couldn't believe her ears. -  John Grant.


  1. Despite the current crisis the EURO has been a major contributor to intra-European trade over 10 years eliminating all bank FX charges. Without the EURO the speculators would have descended on the national currencies like the lira to their satisfaction. I don't think they would have weathered the financial storm caused by the Lehman Brothers collapse. Also let us point out that the ECB keeping inflation low has prduced stability and has made it possible to keeping borrowing costs low for both the private and the public sectors, thereby contributing to more economic growth and employment. The euro is also attractive to foreign governments as a reserve currency. This is of benefit to the whole euro-zone economy because widespread holdings and a high demand for euros encourages third countries to price their exports in the single currency—thus reducing costs to euro-zone members as there are no exchange-rate costs.

    The real reason for the euro crisis is the fact that the euro zone is a monetary union that is not supported by an economic and political union. There are 17 independent governments, 17 different economic policies and 17 bond markets. The result is that, despite the existence of a stability pact (which is too weak by the way), the divergence between the euro countries (their competitiveness and their effectiveness) increases, rather than decreases. This has led to a decrease in the cohesion of the euro zone and hence to the current euro crisis (mainly in the form of increasing "spreads"). For almost a decade, decision-makers have claimed that "peer pressure" and "best practices" (the Lisbon Strategy) would strengthen the cohesion of the euro. They claimed that member states would not have to give away any of their decision-making power or sovereignty. They were wrong and the crisis has revealed that this idea is a folly. In reality the contrary has happened: the cohesion within the euro zone, has diminished not increased (look at Greece!).

    The politicians should transfer more powers to Europe and become more integrated.

  2. You mention that a reason the euro can't work is that the eurozone is too economically diverse. This is a point which is central to the anti-euro argument, and one which I will address.

    We need to remember that no nation state or region is an optimum currency area on its own. All have, to a large or small extent, regional differences. Currency areas are thus decided by political considerations more than economics.

    The 'flow' of history is bringing us closer to integration. In the dark ages we had local currency systems and then in the 19th century we moved to a national currency area. And it is clear that the new challenges of the 21st century, not least the rapid growth of free trade of goods, services and capital across the globe, are requiring more global currencies: the dollar, the yuan and the euro (possibly the yen?).

    The dissolution of the euro zone, along with the inevitable competitive devaluations of weaker currencies, would result in an enormous setback for Europe (which you admitted). European economies pursuing the path of stability and low inflation would be forced, just as before the euro to shadow the Deutschmark. Other countries would be tempted into more economic nationalism and protectionism. And, slowly but surely, Europe would return to being a continent of conflict.

    Moreover, the 17 members of the euro zone represent 300m consumers—second only to America. The collapse or dissolution of the euro would jeopardise this advantage when all indicators are pointing to the advantages of economies of scale and collective negotiating power on a global level. Monetary sovereignty is of diminishing benefit in a world of increasing interdependence.