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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

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