Being right at the wrong time

For some 15 years now, long before the invention of this blogging thing (harking back to the Good Old Days of Usenet), I\’ve been saying to all and sundry that the problem with the euro is that it simply isn\’t an optimal currency area. Therefore it shouldn\’t try to have a single currency.

Finally we\’re beginning to see serious people saying the same thing:

The Greek financial crisis has put the very survival of the euro at stake. At the euro\’s creation, many worried about its long-term viability. When everything went well, these worries were forgotten. But the question of how adjustments would be made if part of the eurozone were hit by a strong adverse shock lingered. Fixing the exchange rate and delegating monetary policy to the European Central Bank eliminated two primary means by which national governments stimulate their economies to avoid recession. What could replace them?

The Nobel laureate Robert Mundell laid out the conditions under which a single currency could work. Europe didn\’t meet those conditions at the time; it still doesn\’t. The removal of legal barriers to the movement of workers created a single labour market, but linguistic and cultural differences make US-style labour mobility unachievable.

That\’s Joe Stiglitz, a Nobel Laureate. Paul Krugman, another such Nobel Laureate has also been pointing out recently that Spain\’s entire problem is the euro and that Brown\’s one decent economic policy was to stay out of said euro. And of course we\’ve got Robert Mundell there, the Nobel Laureate who was/is the expert on optimal currency areas pointing out that the euro just doesn\’t fit the real world.

Shadenfreude is of course the most delicious of emotions.

But this shows the major thing that is wrong with the entire European Union project. Those running it really do seem to think that if you ignore economics then economics will ignore you. But it ain\’t so. It doesn\’t matter how many communal flags you deploy, how stiffly you stand to attention when \”Ode to Joy\” blasts out of the speakers.

If your basic economic policy is fucked then your economy is fucked.

Which is of course why you should all go out and do something about it today by voting UKIP. We\’ve got to leave this nonsensical system entirely based upon a delusion.

17 thoughts on “Being right at the wrong time”

  1. I think it was widely agreed in the 90s that the euro area didn’t fufill all the criteria for an OCA. The question was: did this matter? After all, optimality is a colossally demanding standard.
    Put it this way. The euro area falls short of OCA status because of a lack of fiscal transfers. But France also falls short of OCA status because capital mobility within the country is very low:
    http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2005/06/lets_break_up_f.html
    Why is the former a big problem (requiring the breakup of the euro rather than more fiscal transfers) but not the latter?

    Tim adds: Well, the importance today is that we’ve an election going on, one party (despite they’re in other areas being mostly to my taste) arguing that we not only should enter the euro in the future but that it’s a tragedy we’re not already in it.

  2. Look, I do hope people will avoid any type of trimphalism over this. The euro was a mistake, and we were right to stay out. But there are real people over there who are at this very moment frightened about poverty in old age, about cuts in health care, etc etc.
    The EU leaders gambled that they could get the system right, they gambled with the economic lives of their citizens, few of whom really wanted to surrender their currencies.
    The alternatives now are economic dictatorship or a breakup of the euro into German zone, a Mediterranean zone, or any other combination of nations.
    My feeling is that the EU will try the first before accepting the inevitability of the second.
    Either way, the project is completely wrecked.

  3. The Great Simpleton

    The real question that we should be asking is why wasn’t there a plan?

    As you point out, many serious people, some of them supporters, warned that this could be a problem. If those in the center of the EU are so clever why didn’t they prepare this eventuality?

    And they still expect us to believe in the power of centralised political planing.

  4. “Why is the former a big problem (requiring the breakup of the euro rather than more fiscal transfers) but not the latter?”

    because the citizens of France, and other European nations who manage to keep their public finances in reasonable order, are much more willing to pay taxes on a national basis than they are to pay taxes each year to fund the Greeks?

  5. Introduction of the Euro was a triumph of wishful thinking over critical thinking. In other words, it was a colossally stupid idea, but a stupidity of a particular sort. In further words, I told you so you fucking fools.

  6. I think there was a plan, but the banking crisis made it worse than they had predicted. The plan? Errant countries screw up and so the EU takes over their Treasuries. End of meaningful NationL Sovereignty.

    Yes people are suffering, but the last thing they need is this rejection of reality and demad for some mystery outside source of money to pay off debts and maintain an unearned lifestyle. Better to face up to it, knuckle down and sort it out.

  7. Tim I enjoy your blogging all the time and agree with you a lot of the time, including on the advisability of Britain joining the Euro. But have you read any UKIP election bumf? I mean, really, doubling defence spending? Increasing the size of the army by 25%? Various absurd maunderings about imigration? What are you doing associating with this bunch? Surely current circumstances make it vanishingly unlikely that any party, even the Lib Dems, would take Britain anywhere near a shared currency any time soon, so why associate yourself with the rest of the illiberal tosh that makes up UKIP’s platform in the meantime?

    Tim adds: Because I want that in or out referendum.

  8. The Pedant-General

    “Tim adds: Because I want that in or out referendum.”

    Ah: you should be voting Lib Dem then.
    😛

  9. What’s the economic theory that supports the idea that Greece’s best economic policy would be one of continual devaluation? It is based on massive money illusion?

  10. JM: “But have you read any UKIP election bumf?” I have, yes.

    “I mean, really, doubling defence spending? Increasing the size of the army by 25%?” They never said that. They said increase defence spending by 40%, as well as get out of Afgh. Not sure about doubling size of army, it doesn’t sound familiar.

    “Various absurd maunderings about imigration? “ The Tories are now saying more or less what UKIP have been saying for a while, only UKIP mean it and the Tories don’t.

    I can’t dispute that some bits of their manifesto are flaky (the high speed rail nonsense, but then all parties say that) and some bits possibly nonsense, but hey, it’s still better, as a package, than anybody else’s.

    Just a pity it doesn’t include Land Value Tax, of course.

  11. On the specific point, UKIP want to double the size of the TA – even less achievable than doubling the size of the Army.

    I’m less concerned about the impossible stuff – the Lib Dem and Labour manifestos are both worse on that score – than the statist authoritarianism that I would have hoped would also worry Tim.

  12. “UKIP will support homeopathy through the NHS”.

    Taxpayer, drop dead, seems a common theme.

  13. Johnathan Pearce

    Mark, I would have thought you would support
    the LibDems and their so-called mansion tax which is a very rough cousin of your beloved LVT

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