Nine years ago, I did tell you:
The EU is not an optimal currency area. So it is inevitable that the
disbenefits outweigh the benefits, if one looks at it in a solely
economic manner.
Yes, I was right, wasn\’t I?
Nine years ago, I did tell you:
The EU is not an optimal currency area. So it is inevitable that the
disbenefits outweigh the benefits, if one looks at it in a solely
economic manner.
Yes, I was right, wasn\’t I?
Na na…told my brother (the one with the A in A-level Economics) that three days before White Wednesday đ
Another great example of why we should leave the big decisions to the politicians…….
……..Not
I award you the righteous dude lifetime attachment award. what a complete and utter fuck up…the supporters and designers of this dog chewed pigs trotter, should be in the dock.
The optimal currency area is the whole world.
We had a world currency once. It was called gold.
Do you want a prize? You would have to share it with the other 40 million or so Brits who were against the Euro at the time.
fjfjfj,
I’m sure you’ve got your name right, but the rest of your post has to be a misprint, surely?
Or have you not the slightest idea what you are talking about?
“We had a world currency once. It was called gold.”
Alas we still had financial crises. The 1873 one was a doozy.
I have a teensy weensy suspicion that gold is coming back as a global currency.
heroin or cocaine are fairly universal currencies. Tradeable eveywhere.
The logic here seems to be “there’s an economic crisis in Europe. Therefore the euro has failed. I was right, haha, hehe”.
Given that there’s also an economic crisis in the US, presumably this means that the dollar has failed?
Tim adds: Not really: there’s a currency crisis in Europe so it’s fair to blame the currency.
It’s a debt crisis really, though. The euro may not have had positive macro effects over the last 10 years, but it isn’t the reason why Greece is going to default on its bonds. Had Greece borrowed from German banks in Deutschmarks, it’d be in the same position that it’s now in.
No John b, if that was the case Greece would have defaulted by now and a resolution would have been worked out, as happens with bankruptcies.
Its the Euro that’s stopping the resolution of the problem, therefore its a euro crisis.
No, it’s the contagion it would present to the European banking system. Which isn’t the same thing, and it’s primarily anti-EU people who pretend otherwise.
Sean – precisely. The euro has made precisely no difference to the Greek taxpayers’ failure to meet their obligations. No euro and those obligations were either not met or met in freshly-printed drachmas, which amounts to the same thing. With euro, those obligations are not met. Currently, they are being met by other taxpayers in other countries. That’s the only difference.
Greece can happily default and stay in the euro. It’s only political pressure from slightly more solvent countries that will cause them to leave if they default.
The Euro was part of the process that brought greater cross-border risk, of course (not confined to single currency areas, as highlighted by the Lehman aftermath). But claiming it’s the *same thing* isn’t reasonable.
Overlapped with JamesV, who is right.
The point of money is to be a universal medium of exchange. The more universal, the better.
Any use of different currencies in different territories is a partial reversion to barter.
JamesV – “The euro has made precisely no difference to the Greek taxpayersâ failure to meet their obligations.”
Sorry but that is not true. Without the implicit guarantee of the Germans no one in their right mind would have lent them so much money. Nor would they have been able to borrow so much at such a low interest rate. Both of these are major contributors. Having their interest rates fixed elsewhere means they cannot just inflate their way out of their problems. What is more, the Euro fixes their exchange rate at the wrong level which means they also find it impossible to trade their way out of this mess.
Sure, the Greeks would have probably screwed up anyway, but the Euro has made all their problems so much worse.
For John b
1) The Euro allowed Greece to borrow far more than they would have been able to without it
2) Investors finally realised than Greece is not Germany
3) Greece is required to slash spending, destroying confidence and leading to a prolonged recession.
4) Greece is unable to devalue its currency to get its economy moving again
Without the Euro, Greece would have had much less debt and a devalued currency (effectively a form of default) leading to a rebounding economy.
…..Greece can happily default and stay in the euro. Itâs only political pressure from slightly more solvent countries that will cause them to leave if they default…..
But that would be stupid.
Default by leaving the Euro and you get economic growth thrown in for free. You also get far higher prices in Drachma for companies you sell.
SMSF: the thing about implicit guarantees is that – unlike explicit guarantees – you can’t necessarily rely on them.
“Official Euro area” interest rates are a red herring: just as subprime borrowers in the UK pay higher interest rates than blue-chip companies on their borrowings in pounds, there’s no reason why Greece should ever have been paying similar interest rates to Germany.
The problem is more that the Greek national accounts were fraudulent, and (domestic and international) financial institutions were remarkably gullible.
The Euro crisis goes far beyond Greece, nor was Greece was the first to go. That was Ireland thanks to the unsustainable property bubble stoked up by the Euro imposing negative interest rates on a growing economy.
Would Greece be bankrupt without the Euro? Yes, that is what happens when a state gets too big.
However would Greece be going bankrupt for so much thanks to being able to borrow so much, for so long, at such low interest rates, without the Euro? No.
Would Ireland have had negative real interest rates stoking up a huge property bubble without the Euro? No, standard inflation targeting by the Irish central bank would not have allowed it.
Would Spain have had negative real interest rates stoking up a huge property bubble without the Euro? No, or the same reason as Ireland.
Would Italy have spent 10 years of stagnation as it lost competitiveness against its neighbours without the Euro? No, the Lira would just have devalued against the Deutsmark.
Would any of these countries be able to do more to help themselves without the Euro? Absolutely: their currencies would have devalued increasing competitiveness and reducing the external value of the debt. They could have cut slower rather than having such huge cuts forced in them, and so reduced the number of lefty thugs rioting on the streets. They could even have tried printing money to induce inflation and reduce the real value of the debt. Inside the Euro the only option is internal devaluation, or Debt Deflation as it is otherwise known.
Would therefore this economic crisis be spreading across the whole of Southern Europe? No, because there would be fewer wounded states there to infect, and had they been infected then they would have better remedies available to fight off the disease than bleeding.
Chris: so CPI targeting in a free-floating economy prevents property bubbles? I hope you’ll be sending your apologies to Gordon Brown for suggesting anything went wrong in the UK, then.
@SMFS,
There was never an implicit guarantee from Germany, in fact the Maastricht treaty makes such guarantees illegal! So much for treaty obligations, eh?!
Really, eurocritics seem to want their cake and eat it. If you have centrally-determined interest rates that’s bad. If you have different yields on bonds from different countries, which is the exact opposite of that situation, that is bad too.
Look, anyone who really thinks that the wild fluctuations in exchange rates over the last 3 years we’d have seen with no euro would have done less damage to the EU economy than political errors over Greece, raise your hand.
Likewise, if Greece was on the brink of default and unable to pay its police, army, civil servants, teachers and so on, do you really believe we would all be folding our arms and leaving them to it – whether in the euro or not? In fact, whether in the EU or not? In what sense would it be in our interest to have a failed state for a next-door neighbour?
I’m not defending the bailout per se, but I do think it is better for the long term that we have had it, that Greece will go under anyway and it is therefore seen to fail, and so it will not be repeated. I also wouldn’t defend the idiotic expectation of countries being able to borrow at the same interest rate whether in or out of a currency union – but I do think it’s better for the long term that we saw that and it was seen to fail and so it will not be repeated. The only thing the eurosceptics need to get into their heads in that regard is that what the ECB says about interest rates is almost totally irrelevant to what a government has to pay to raise funds. The expectation that these costs would all be about the same was always completely wrong.
What JamesV said. The fact that Greece was able to borrow at the same interest rate as Germany during the 2000s was a nonsense, but it was a failure of the international banking system – in a sane world, the question “what will happen if it turns out that Greece is a crooked failed state and Germany is Germany?” would’ve been asked, and would’ve added the same premium to national debt interest that Del Boy would face versus General Electric when trying to get a loan.
James V: If you have centrally-determined interest rates thatâs bad. If you have different yields on bonds from different countries, which is the exact opposite of that situation, that is bad too.
Um, not quite, at least not if I remember my monetary theory correctly. There are two issues going on in setting a specific interest rate on a bond:
1. What is the “risk-free” interest rate. (Quote-marks because there’s inflation risk, and a bit of a risk of a default, and there may be currency risk if you’re borrowing from overseas).
2. What is the correct adjustment for risk, given who you are lending to.
If you can lend “risk-free” at 2% a year, then a would-be borrower who is risky is going to have to offer something more than a 2% rate of return to encourage you to lend to them, say a 2% profit to get to 4%. If the “risk-free” rate goes up to 5%, you’re not likely to lend to the risky person at 4%, so even if the would-be borrower is no more likely to default, they are going to have to offer even more to encourage you to lend to them, and take on that extra risk.
What a central bank can do is influence the “risk-free” interest rate, by lending or borrowing money to get whatever rate it’s interested in to whatever level it’s targeting. Because the central bank controls the currency supply, it can theoretically lend or borrow unlimited amounts (although the consequences of some extreme actions may be higher than what the central bank is willing to pay). If you have different currencies, then different central banks can set the interest rate they target differently (and indeed what specific contract they target differently).
This is quite different to charging people or companies or governments different interest rates based on risk.
Look, anyone who really thinks that the wild fluctuations in exchange rates over the last 3 years weâd have seen with no euro would have done less damage to the EU economy than political errors over Greece, raise your hand.</i<
Hand up. I've lived in NZ through wild fluctuations in exchange rates. Tough on some players, but not disastrous. The major exporters and importers hedge their forward currency. Life goes on, people adjust the relative purchases of imports and exports.
(I mean, I'm not 100% sure on this being better, but my Bayesian probability is about 70%).
Likewise, if Greece was on the brink of default and unable to pay its police, army, civil servants, teachers and so on, do you really believe we would all be folding our arms and leaving them to it â whether in the euro or not?
I haven’t noticed any strong ambition on the behalf of the UK, or the Scandinavian countries, or Switzerland, to bail out Greece. Admittedly they’re not next door to Greece, but then neither does Turkey seem to be eager to rush to Greece’s aid.
In what sense would it be in our interest to have a failed state for a next-door neighbour?
Well it doesn’t seem to be disastrous for Australia to have Papa New Guinea next door. I don’t think it’s a plus to have a failed state for a neighbour, I’m sure Australia would be better off if the Papa New Guineans were as rich as the Singaporeans, but it doesn’t seem to be disastrous for them.
The other side of the question is how do you stop another country from being a failed state? Australia and NZ have been trying to influence Fiji for decades, and Australia has been trying to influence Papa New Guinea for decades. I think that the only people who can stop a country from failing are its own inhabitants, and even for them it can be a massive struggle, I don’t think most of us have the political nous. (I do think that many countries could easily wreck their neighbouring countries, but it’s true of many things that destroying is easier than curing, e.g. you don’t need a medical degree to be an effective murderer).
john b – “the thing about implicit guarantees is that â unlike explicit guarantees â you canât necessarily rely on them.”
And yet markets can and do price them.
“âOfficial Euro areaâ interest rates are a red herring”
How can they possibly be a red herring? Given they allowed Greece to borrow much more?
“thereâs no reason why Greece should ever have been paying similar interest rates to Germany.”
I agree. But the Euro was an attempt to make sure they did. In so far as anyone believed that it could, it resulted in lower interest rates in Greece. The lack of fiscal discipline in the South was the great attraction of the Euro in those parts.
“The problem is more that the Greek national accounts were fraudulent, and (domestic and international) financial institutions were remarkably gullible.”
The Europeans signed off on the Greek accounts. The Europeans implicitly and even explicitly stood behind the Greeks. And yet even six years ago I was writing here about the difference between Greek and German bonds (and the inevitable breakdown of the Euro). Those financial institutions noticed. Our European Masters did not.
JamesV – “There was never an implicit guarantee from Germany, in fact the Maastricht treaty makes such guarantees illegal! So much for treaty obligations, eh?!”
Sorry but there is. That is the whole point of the Euro.
“If you have centrally-determined interest rates thatâs bad. If you have different yields on bonds from different countries, which is the exact opposite of that situation, that is bad too.”
I don’t recall anyone claiming that different yields on bonds from different countries is bad. I certainly never have done so. Although I suppose I might agree but only one the one condition that the same bond rates are the result of equally tight fiscal discipline in both countries.
“Look, anyone who really thinks that the wild fluctuations in exchange rates over the last 3 years weâd have seen with no euro would have done less damage to the EU economy than political errors over Greece, raise your hand.”
I do so think. In fact without the Euro we probably would not have seen these wild fluctuations in exchange rates.
“Likewise, if Greece was on the brink of default and unable to pay its police, army, civil servants, teachers and so on, do you really believe we would all be folding our arms and leaving them to it â whether in the euro or not? In fact, whether in the EU or not?”
If Greece had its own currency it would not be in a position where it could not pay. And I don’t know. Perhaps we might send in the IMF and the World Bank to produce a rescue package. Maybe that might even be a good idea although I am skeptical.
“In what sense would it be in our interest to have a failed state for a next-door neighbour?”
They are already a failed state. It is just that German money has enabled them to pretend otherwise for a while.
“but I do think itâs better for the long term that we saw that and it was seen to fail and so it will not be repeated.”
Wouldn’t it have been a little bit smarter to have listened to the people who, you know, knew a f**k about these sort of things and predicted that this was going to happen? Why do we all need a spanking when in fact *most* of us saw the problem and did not want to do it? Why is it better for us to have paid for the asinine stupidity of our Lords and Masters when in fact they were told, and most of us knew, that this was going to happen?
I agree with john b. But don’t the ratings agencies have something to do with this? Weren’t they rating Greece highly even when it was obvious it was borrowing to pay running expenses, a blatant red flag?
Are there deserted villages of unsellable properties, like in Ireland? Did the construction industry hit 20% of GDP, like in Spain? Were there ever more properties being constructed than could possibly be sold, like in both? Compared to the results from the Euro imposing negative real interest rates the UK got off very lightly and Norman Lamontâs decision to start inflation targeting was a very good thing. Only a moron would claim that imposing negative real interest rates on a growing economy isnât going to create an asset bubble which will eventually burst.
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