Regular readers have often heard me compare the Euro to the gold standard. In effect, the Euro as a single currency system is restrictive in exactly the same ways that the gold standard was restrictive. I have referred to this as the “inefficient market irony behind the Euro crisis“. I haven’t seen the comparison made too often elsewhere until reading the Financial Times the other day. Edward Chancellor of GMO beautifully describes the restrictions of single currency systems and why they ultimately fail:
“The euro has also failed to meet the expectations of its exponents. Like the gold standard, it lacks a self-equilibrating mechanism. Instead, countries with chronic trade deficits, such as Greece and Portugal, have relied on the recycling of trade surpluses from Germany. Their economies buckled when lending dried up.
Several eurozone members, including Italy and Ireland, have seen their production costs rise relative to Germany. Under a floating exchange rate regime, they would simply devalue. Within the eurozone, however, they are forced into deflation to regain competitiveness.
Having surrendered monetary independence long ago, eurozone members are now losing their fiscal freedom of action. Angela Merkel's Germany, a top creditor nation and modern scourge of profligacy, plays the role of France in the 1930s.
The burden of the euro is getting heavier. Spain's unemployment rate has reached Great Depression levels. Ireland is experiencing its severest deflation since the 1930s. Greece and possibly Portugal are on the verge of default. The pain thresholds of the eurozone economies may well be lower than in the 1930s, since debt levels are far higher.
In one respect, the euro is worse than the gold standard. The costs of going off gold turned out to be negligible. Leaving the eurozone may be much harder. Any country that signalled such an intention would most likely spark a run on the banking system and a collapse in government lending. The entire eurozone financial system would also suffer collateral damage. Euro-fetters are proving scarcely less agonising and certainly more binding than the golden variety.”
I couldn’t agree more. In my opinion, the currency union was founded on false premises and only continues to this day because so much political will has been invested in its success. Although I believe the Euro is destined to fail I also believe the European politicians will continue to impose a great injustice on their citizens. Unfortunately, there is no bailout or political will that will help it to succeed and any politician who believes that the Euro should continue to exist does not grasp the economic instability caused by the Euro and is allowing his/her ego to destroy the lives of their citizens via the continued use of a flawed currency system. Ultimately, however, the citizens will awaken to the flaws of their currency system. They will either force change preemptively or economic downturn will force change upon the Euro area.
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The political will will overide everything for the time being. But this crisis has highlighted the flaws of the system and exposed its limitations.
I have the feeling that it is going to spur the politicians into action and try to remedy some of the issues in order to fix them.
Right now the system is too rigid with everyone from day one, having flouted the rules without consequences ( France, Germany, Italy, Greece etc..)
Now is an opportunity to sit down and work out out to fix it by being more flexible. Maybe a bit like the USA which is a federal system with buffers.
There is too much at stake. Europe with all its flaws has been a huge success.The main achievement (and not a small one) has been NO WARS. It is the first time in the last few hundred years that there has been such a long period (65 years) without a war in continental Europe.
It might seem nothing to the young generation but I would qualify it as its biggest achievement.
I don’t know if the lessons of the Gold standard in the 30′s have been learnt. But we all know how it ended.
Right now everybody is huffing and puffing but the seriousness of the situation might be the best chance to grab the occasion and do something.
Don’t write off the euro. It will outlast us but not in its present incarnation
There is too much political will in the Euro to let it go now. Also, as you point out, it is a hell of a lot harder and very messy to get out of. The Europeans have only one choice – full federalization. And they will probably have to face this choice when the ECB does the inevitable bailouts of entire countries.
Now, they might let Greece go (although I am doubting they will). It is a very special [basket] case, and is also very small. But even if they let Greece go, they won’t let anyone else go. Once the ECB monetizes soverign debt without sterilization, as they inevitably must, I don’t see how the EU can avoid full Federalization – as a purely political matter. How can the Germans be expected to pay for the rest of the EU’s profligacy without a commensurate measure of shared political control? This is the kind of stuff that makes a German voter’s blood boil. And if any national banking systems fail, the only institution that can finance a bailout, or even finance a payoff of the depositors, is the ECB, since it alone prints Euros. After a few large bailouts, how can they avoid Federalization? You can’t argue national soverignty if you are dependent on the ECB. I don’t see any legitimate political arguments that would let them avoid it.
There is too much political will in the Euro to let it go now.
Agreed.
The Europeans have only one choice "“ full federalization.
That would be the optimal choice, at least from the standpoint of the currency. But it isn’t the only choice.
The status quo will work well enough, in that the euro won’t collapse. But the ECB needs to wake up and realize that the euro will never achieve its goals of becoming a top-tier reserve currency if it fails to rationalize its policies, instead of merely acting as a puppet of the Bundesbank.
One of the primary missions behind the euro was to compete head-on with the dollar, and this crisis makes it clear that this is highly unlikely to happen. The reserve currency of the future will not be coming out of Europe; at best, it will be one piece of a basket chosen by someone else, most likely the PRC.
Deflation means you get more for the buck. Its often confused with Hyper deflation where consumption stops because you get it cheaper tomorrow. This doesn’t happen in -1 % per year scenario. Japanese Population is poorer today by numbers but most people have a higher life style. GDP in Germany dropped by 5 % in 2009 but the economical effect on wages, jobless etc was defacto ZERO. Nice proof that Banking balances are irrelevant in a countries needs. Problem is these “experts” dont realize that there number base has lost its ability to measure whats important. Deflation is the only way, dont know why the US Economic Blogoshpere is so horrified of something so wonderful. Germany can continue to increase efficiency on resource usage and production capabilities and thereby forcing there neighboring competitors to the same. The effect will be that the Eurozone will become a export region as Germany already is and thereby successfully competing with rising China and co.
Deflation means you get more for the buck. TK7936
P = MV/Y
Where:
P = price level M = amount of money and credit V = velocity of money = average money exchanges per year Y = aggregate output
Price deflation can thus be caused by decreasing M (bad) or decreasing V (bad) or increasing Y (good).
Deflation means you get more for the buck.
No, it doesn’t. Deflation is defined as falling output.
With deflation, there are fewer bucks with which to acquire goods. That’s why it’s a bad thing — prices aren’t just falling in a vacuum, but are also pulling down the rest of the economy with it.
GDP in Germany dropped by 5 % in 2009 but the economical effect on wages, jobless etc was defacto ZERO.
Under normal conditions, Germany tolerates levels of unemployment that would be unacceptable in the United States. http://www.indexmundi.com/germany/unemployment_rate.html It’s manageable for the population because of social welfare systems, but the rates by US standards are consistently higher — we associate these rates with recession, not prosperity.
The effect will be that the Eurozone will become a export region as Germany already is
Germany’s largest export markets are nations in the Eurozone, plus the UK and US. The Germans can maintain a large trade surplus because other nations in Europe are using the same currency to buy German goods. The very thing that gave Greece, etc. a spending bubble is what has given Germany an export bubble.
@Angry MBA “With deflation, there are fewer bucks with which to acquire goods.”
Not necessarily. It can also mean there are more or better goods to acquire while money supply stays the same or doesn’t grow as fast. And that was the point of my comment -by increasing production through efficiency you essentially make a profit on the consumer side without needing more money. Credit is the opposite of this -interest is defacto a decrease in efficiency to buy goods requiring more credit to compensate and therefor the primary cause of inflation. So the official (Harvard ideologic) definitions are incomplete -at least.
“Germany's largest export markets are nations in the Eurozone, plus the UK and US. The Germans can maintain a large trade surplus because other nations in Europe are using the same currency to buy German goods. The very thing that gave Greece, etc. a spending bubble is what has given Germany an export bubble.”
Debt is merely the side effect of not producing values -debt is a symptom of a invaluable currency. Which is why my prediction for the eurozone to “become more German” is the or a solution -for the eurozone. This will of course take place in symbioses with other production economies like China which is why china already is becoming Germanys largest customer outside the eurozone. For debt is not needed, just the exchange of values, but if you have no value to swap you need debt or simply not buy what you cant afford. The Banks will always offer credit -its there blood but no one is forced to take it to replace ones own non production.
Deflation def: A decline in general price levels, often caused by a reduction in the supply of money or credit. Deflation can also be brought about by direct contractions in spending, either in the form of a reduction in government spending, personal spending or investment spending. Deflation has often had the side effect of increasing unemployment in an economy, since the process often leads to a lower level of demand in the economy. opposite of inflation. from http://www.investorwords.com/1376/deflation.html
Not necessarily. It can also mean there are more or better goods to acquire while money supply stays the same or doesn't grow as fast.
It’s funny how you deflationists believe that it’s possible to have a sustainable economy in which everyone else’s wages are falling, but that yours aren’t. It’s an absurd belief that makes absolutely no sense from a macro standpoint.
Inflation is primarily a byproduct of wage growth. In a deflationary economy, wages are falling, output is falling and unemployment is rising.
Germany is hitting a wall. Like Japan, it has terrible demographics, while it fights to preserve a trade surplus. Like Japan, its domestic companies are looking for opportunities to escape from the high-cost local labor force and set up shop in lower wage markets.
…which is why china already is becoming Germanys largest customer outside the eurozone.
Not even close. Germany is a net importer from China, and Germany’s largest customers are the US, members of the Eurozone, and other parts of Europe. As of 2008, Germany’s largest markets were:
France 9.7% US 7.1% UK 6.7% Netherlands 6.6% Italy 6.4% Austria 5.4% Belgium 5.2% Spain 4.4% Poland 4%
Meanwhile, companies such as VW build plants in China, and build cars for the Chinese in China. German automakers would prefer to expand in lower-cost nations such as Portugal, Hungary, South Africa, China and the US, rather than deal with some of the world’s highest wage rates and strongest unions. If German companies are going to do more business in the PRC, they’ll be doing most of it with production from Asia, more so than from Germany.
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