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Allow me to throw some gasoline on this fire:

Doomed from the start  Billy blog

From the outset, as I have noted in several blogs the initial structural design of the Eurozone was never compatible with a federal arrangement that could cope with large asymmetric shocks. The selection of EMU nations never formed an optimal currency area despite the bevy of lackey economists who wrote a plethora of mathematical papers purporting to "prove" that it was. Please see the blog - España se está muriendo for a detailed discussion on that specific aspect of the EMU debacle.

Not having an OCA was one thing. But then the neo-liberal ideologues entered the fray, driven in part by political prejudices that go back into time (particularly World War 2), and conjured up the Stability and Growth Pact (SGP). The restrictions imposed by the SGP were claimed to reflect economic sense but there is nothing in any economic theory that tells us that the design principles of the SGP were optimal.

In fact, from the perspective of modern monetary theory (MMT) the 3 per cent budget deficit to GDP rule is nonsensical. It would be an extraordinary coincidence for a 3 per cent ratio to be consistent with full employment - that is, taking into account the saving preferences of the households and the trade accounts for each country.

In a 2006 book I published with Joan Muysken and Tom Van Veen - Growth and cohesion in the European Union: The Impact of Macroeconomic Policy - we showed that it is widely recognised that these figures were highly arbitrary and were without any solid theoretical foundation or internal consistency.

The current crisis is just the last straw in the myth that the SGP would provide a platform for stability and growth in the EMU. In my recent book (published just before the crisis) with Joan Muysken - Full Employment abandoned - we provided evidence to support the thesis that the SGP failed on both counts - it had provided neither stability nor growth. The crisis has echoed that claim very loudly.


At least Bill Mitchel is not a neo-liberal, but he does use undefined acronyms. I don't know what he means by an OCA. But he does provide a wealth of alternative views. More below:
As a result of the establishment of the European Central Bank (ECB), European member states now share a common monetary stance. The SGP was designed to place nationally-determined fiscal policy in a straitjacket to avoid the problems that would arise if some runaway member states might follow a reckless spending policy, which in its turn would force the ECB to increase its interest rates. Germany, in particular, wanted fiscal constraints put on countries like Italy and Spain to prevent reckless government spending which could damage compliant countries through higher ECB interest rates.

The indisputable empirical reality is that the EMU countries have never got close to achieving full employment in the period they have had to succumb to the SGP. And the blowout in unemployment in some nations during the crisis is certainly clear evidence that the SGP is incapable of attenuating the magnitude of a serious crisis.

There is a very interesting article published by Lars Jonung, Eoin Drea in the January 2010 edition of Econ Journal Watch, 7(1), 4-52 entitled - It Can't Happen, It's a Bad Idea, It Won't Last: U.S. Economists on the EMU and the Euro, 1989-2002.

It examines how US economists viewed the development and implementation of the EMU from the time of the Delors Report in 1989 through "to the introduction of euro notes and coins in January 2002″. They trace the evolution of ideas on whether the system would work. Most "were skeptical towards the single currency" although they "adjusted their views as European monetary unification progressed."

I don't agree with its conclusions but it is an interesting methodology (tracing the evolution of argument) and many of the skeptical comments were prescient.


I did not copy the many links he provides in the original.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Feb 11th, 2010 at 01:00:48 PM EST
When the euro first debued  around 1999 the exchange rate was 1.17 usd  to buy one euro. About two years after that you could buy a euro for about 85 American cents. Then a long period of strengthening of the euro over several years led it to about 1.50 usd to buy one euro which was about two months ago. Today it takes 1.37 usd to buy a euro.

So, what's the big deal?

Assuming that the rate of exchange the rate of exchange reflects the soundness of an economy it seems like the eonomies of the eurozone are in a hell of a lot better shape than the economy of the U.S. And I'm guessing that a tour of the 50 states of the U.S. compared to the countries of the eurozone would substantiate this.

Hey, Grandma Moses started late!

by LEP on Thu Feb 11th, 2010 at 01:30:36 PM EST
[ Parent ]
When the euro first debued  around 1999 the exchange rate was 1.17 usd  to buy one euro. About two years after that you could buy a euro for about 85 American cents.

The Euro lost value as long as it didn't circulate. When it became a currency rather than just a unit of account, it started going up.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Thu Feb 11th, 2010 at 01:34:45 PM EST
[ Parent ]
It was about a year after it's beginning of circulation on Jan. 1, 2002 that the euro really started its long climb v. the usd. But the fact of its circulation was not the reason for its rise. It was the unsound economic policies of the Bush/Greenspan regime.

Hey, Grandma Moses started late!
by LEP on Thu Feb 11th, 2010 at 01:58:26 PM EST
[ Parent ]
Mitchell is post-Keynsian, if any label would stick, and his concern, as I read it, is less about exchange rates than about employment rates. From his point of view the Stability and Growth Pace, which seeks to constrain budget deficits to 3% is incompatible with the needs of the Mediterranean countries to provide adequate levels of employment. I suspect his recommendation would be to allow certain countries to run higher deficits, but how this is to be reconciled with other requirements, such as reasonable bond rates, I have no idea. I can see that we all are likely to be in trouble if we let the bond traders run fiscal policy through the rest of this crisis, but that is likely to be the ends towards which much policy is directed.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Feb 11th, 2010 at 04:01:22 PM EST
[ Parent ]
it seems like the eonomies of the eurozone are in a hell of a lot better shape than the economy of the U.S.

Mitchell is an Australian and like Keen he keeps a close eye on the USA mostly because it is the 800 lb gorilla. He is definitely not partisan of US interests.

I agree that many, perhaps most, economies and societies in the eurozone are in much better shape than the USA, if taken as a whole and if the counter-cyclical effects of social welfare programs are considered. But as we have repeatedly seen on ET, there is a lot of NCE mind capture amongst governing elites.

Given that the current problems with Greece, Spain, Portugal, Ireland and, probalbly next, Italy appear largely to consist of trees being shaken by powerful financial corporations, such as Goldman Sachs. But it is precisely such powerful financial corporations that "Anglo Disease" NCE theories are designed to nurture and protect. Unless governments intervene Greece and other countries might not just get shaken down, the trees could be broken as well.

To make matters worse, apparently GS has sold the CDOs they wrote around the debt with which they fitted Greece out to Greek banks. Perhaps they have also sold short some of these instruments. I agree with MFM that the speculators, especially GS, need to get the living shit burned out of them. One way might be to declare the CDSs unenforceable due to fraudulent conveyance or other pretexts and then let Greece default on the loans. Not total repudiation but perhaps a 30% haircut. The important thing is that more pain falls on GS and other financial institutions than on the bottom 90% of the Greek population. If they blew up GS that would be a very good thing from my point of view.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Feb 11th, 2010 at 04:23:46 PM EST
[ Parent ]
Yes. I've been dreaming about how Europe can stick it to GS and friends. But that might bring the UK down ;)

Hey, Grandma Moses started late!
by LEP on Thu Feb 11th, 2010 at 04:34:19 PM EST
[ Parent ]
But that might bring the UK City down ;)

Fixed it.  Then the rest of the country could breathe.   :-)

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Feb 11th, 2010 at 05:02:58 PM EST
[ Parent ]
he does use undefined acronyms. I don't know what he means by an OCA
The selection of EMU nations never formed an optimal currency area despite the bevy of lackey economists who wrote a plethora of mathematical papers purporting to "prove" that it was. Please see the blog - España se está muriendo for a detailed discussion on that specific aspect of the EMU debacle.

Not having an OCA was one thing.

EMU is European Monetary Union, the precursor to the Eurozone.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Thu Feb 11th, 2010 at 01:38:24 PM EST
[ Parent ]

It is interesting that Denmark, which did not enter the EMU, maintained strong growth in real hourly earnings and has not been damaged nearly as much by the crisis as some of the EMU nations.

Denmark has pegged its krona to the euro. This is a silly argument.


First, the nations' leaders agree to surrender their currency sovereignty - they didn't have to but chose to. They largely mislead their citizens with spurious arguments about optimal currency areas and the rest of the sophistry that the neo-liberal economists happily fed them.

They had no currency sovereignty to start with. Monetary policies were driven by the Bundesbank's already (under the watchful eye of the markets) - today the ECB has policies that are designed for the whole area - somehow nobody remembers when the Germans were complaining that the ECB policy was too tight for them...


Fifth, when the whole things meltdowns due to its design and the German strategy, the nations which are now in extreme crisis are told they have to introduce harsh pro-cyclical fiscal policies to savage living standards of their citizens.

As if the current crisis had anything to do with the eurozone and was not caused by the global meltdown and, now, worries about public debt started in the US and UK that somehow end up blaming the Greeks and the euros.

So, bah.

Again: don't trust anything written in English about Europe or the euro.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Feb 11th, 2010 at 02:45:20 PM EST
[ Parent ]
The Nordics in the global crisis | VoxEU
The Nordics have all had different monetary regimes since the euro. Given their similarity in other respects, a comparison of Finland and Sweden is especially interesting. It is almost a laboratory experiment. Sweden has a floating exchange rate and an independent central bank geared to price stability, while Finland is part of the Eurozone. Who has made the better choice?

The krona was mostly stable and developments in Finland and Sweden were strikingly similar during the first decade of the euro. Once the crisis erupted, however, the krona fell significantly relative to the euro, thereby strengthening the price competitiveness of Sweden relative to Finland and the euro area. One might expect this to help Sweden come through the crisis at less cost than Finland, arguably benefitting at the expense of its neighbour by capturing market shares.

The decline in exports and output in 2009 was indeed smaller in Sweden than in Finland, and GDP growth is forecast to be somewhat faster. However, the differences do not seem large. Also, manufacturing output shows little response to the change in competitiveness, and unemployment is rising in parallel with developments in Finland.

Either the effects of the improved competitiveness are relatively modest or the lags are long, or a depreciation of a floating currency has less effect on export and output volumes than a devaluation of a pegged currency used to have. What is clear is that the floating exchange rate does not insulate an economy from external shocks, and the economic differences between the two exchange rate regimes seem smaller than often claimed in the heated debate about the Eurozone.



"Ce qui vient au monde pour ne rien troubler ne mérite ni égards ni patience." René Char
by Melanchthon on Thu Feb 11th, 2010 at 04:28:08 PM EST
[ Parent ]
That's only because Sweden is a net exporter.

If it were a net importer, Sweden's foreign debt would have blown up with the falling Krona.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Thu Feb 11th, 2010 at 04:32:03 PM EST
[ Parent ]
Yes, but what they say is, despite being a net exporter, the falling Krona didn't boost the Swedish economy as the dominant theory narrative claims...

"Ce qui vient au monde pour ne rien troubler ne mérite ni égards ni patience." René Char
by Melanchthon on Thu Feb 11th, 2010 at 05:12:01 PM EST
[ Parent ]
Denmark has pegged its krona to the euro.

And, more importantly, so has the Bundesbank.

The DKK is overvalued (based on my experience with the relative purchasing power of DKK and €, it should be trading at roughly €:DKK 1:10 rather than 1:7.5) and we have a structural current accounts problem, so it's not so much a case of Nationalbanken pegging to the € as the Bundesbank guaranteeing the DKK.

(Of course the picture is complicated somewhat by the oil revenues which permit us to maintain what looks like a balancing foreign trade when we are actually selling out our assets hand over fist.)

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Feb 11th, 2010 at 06:54:34 PM EST
[ Parent ]

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