No, no, of course not, no, no way, not at all.

Voices on right and left insist that what is happening in Ireland is the fault of the EU and the euro.

Couldn\’t possibly be, could it?

Look Hutton, you\’re becoming an embarrassment to the alma mater.

Before the euro started, back when we were all still talking about whether to join EMU or not, there were people of right and left who actually got this right.

The euro area simply isn\’t an optimal currency are. For God\’s sake, even Gordon fucking Brown got this one.

The effects of changes in interest rates will be hugely different in places where the vast majority of housing is owner occupied (UK and Ireland) as opposed to rented (Germany, say). And hugely different where mortgages are floating rate (UK and Eire) as opposed to fixed rate (Germany).

In the former a lowering of interest rates reduces housing costs for almost everyone. In the latter it only changes costs for the marginal uptake of new housing purchases. Similarly, a rise in rates will lead to a huge reduction in spending power in the former model while having little effect in the latter. So whether it\’s boom or bust, the effects are greatly magnified in one type of economy: something of a problem when those rates are being set for the other type of economy.

Right back from the late 80s this was obvious. As it happened, it turned out to be the low interest rates needed by the euro core countries that  screwed over Ireland (aided, yes, but not caused by, the local corruption and banking stupidity). But if it had worked the other way around, if Germany and France had been facing inflation and thus interest rates were set to reduce that, then Ireland would still have been screwed over. Just the other way: whether you\’re getting screwed missionary or doggy style you\’re still getting screwed.

Single currencies in non-optimal currency areas just don\’t work. Period.

And no, clever management by clever technocrats cannot be sufficiently clever to overcome this basic fact.

12 thoughts on “Willy again”

  1. While about the only upside I see to the euro is that it slows down my foreign currency accumulation, is it really the case that a currency has to cover an optimal area? Is the USA really an optimal area?

  2. The £ isn’t an optimal currency area, as Tim pointed out (rendering the North-East to state-spending dependency). But it is in a political union with free flow of labour and capital. Given the belligerent nature of Labour’s kleptomaniac heartlands, perhaps we shouldn’t be in a political union.

  3. Nowhere is an optimal currency area, because an optimal currency area is an ideal against which to compare reality. What matters is how far any proposed area is from that ideal. The Eurozone is so far from that ideal that adoption of the Euro must be seen as (i) criminally stupid, or (ii) a malevolent plot, or (iii) a very cruel joke indeed. The anguish would be abated, however, by a few well-judged hangings.

    Tim adds: Well, sorta: Brixton is far too small to be an optimal currency area. There would be huige gains from trade by allowing Lewisham into that currency area, as one example. The EU is clearly too large an area (with too many differences etc) to be optimal. Somewhere inbetween it the optimal size.

    Note that it’s not optimum: perfect. Optimal, the best we can get balancing costs and benefits only.

  4. ‘Optimal’ is perhaps the wrong word to use. There are necessary conditions for being a functioning single currency area – eg mechanisms for internal transfers, minimal differences between regions in economic cycles, political union with free flow of labour (which arguably requires a common language) and capital…And the US and UK seem to meet these conditions, whereas the Eurozone doesn’t.

  5. What paul ilc said. Common language seems to be the most basic requirement for a currency area. If I could move to Munich as easily as to Manchester, because the language was the same, it would make people following the jobs so much more likely. Someone who lives in Kent is more likely to move 100s of miles within the UK, than the tens of miles to the other side of the channel.

  6. I think the problem with asserting anything is or is not an OCA is to believe in them you have to throw away a lot of economic theory that right-wingers usually believe in.

  7. go ahead, Matthew, please explain for the benefit of “right wingers” the benefits that Ireland Greece and Portugal obtain from being in the Eurozone.

  8. “benefits that Ireland Greece and Portugal obtain from being in the Eurozone.”

    They get the use their cash on holiday without paying the money changers.

  9. Common language seems to be the most basic requirement for a currency area

    This is an epically stupid point. See: Canada, India, Switzerland, Spain…

    If I could move to Munich as easily as to Manchester, because the language was the same, it would make people following the jobs so much more likely

    If you are either unskilled or highly skilled, then the obstacles in moving to Munich are no greater than those in moving to Manchester – it’s only people in the middle for whom language is a problem. And even then, speaking English qualifies you for most business roles across the EU.

    Diogenes: you’re missing Matthew’s point completely. We’re not debating the question that “this week, Ireland would be better off as a non-euro member” – this is not in doubt. Similarly, if I get mugged walking down the street tonight, the statement “I’d have been better off if I’d stayed home tonight” would be true. But it doesn’t have any bearing on whether “never leaving the house” is a good strategy.

  10. John B, the question remains whether Ireland etc have benefitted from the Euro, and whether the Eurozone as constituted can or should survive.

  11. “speaking English qualifies you for most business roles across the EU.”

    Thus saith John b….the person who says that speaking a common language is not needed in an optimal currency area. And Castilian is very widely spoken in Spain, even in Catalonia in 2010. And Swiss and Canadians do tend to be at least capable of using 2 languages…etc etc

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