by JakeS
Thu Nov 18th, 2010 at 06:41:15 AM EST
This started out as a response to a post by Bill Mitchell in which he paints a picture of the € as a project so full of FAIL that everybody would be better served by simply abandoning it outright. I felt it worthwhile to repost it here, because such sentiments, while not expressed in quite that many words, have been echoed here on ET.
I take issue with that conclusion not so much because it is economically unsound. There is an economic case to be made against the common currency (although it is not quite as strong as Mitchell would have you believe). But in my view it misses the point. So without further ado:
There's both more and less going on here than meets the eye.
There's less going on here in three ways: In the first place, the Irish crisis is not a € crisis. The Irish crisis is a crisis of Irish domestic governance. Ireland has a trade surplus, and has had one throughout, so nothing prevents Ireland from simply telling the international money markets to go take a hike. Nothing, that is, except the fact that Ireland is run by corrupt halfwits.
In the second place, the crisis is not inherent to the fact that the EU has a common currency. There are plenty of ways to structure a common currency that do not cause this sort of balance of payments crises. The problem is that the € contains two pernicious elements: The German Stupidity Pact (known in more polite company as the Growth and Stability Pact), and the fact that the ECB is mandated to pursue an inflation-first policy. Neither is an intrinsic requirement for having an EU-wide currency. It would be perfectly possible, for instance, to abolish the GSP, and stabilise current accounts by having the ECB issue a Eurobancor to those countries that have intra-€-zone balance of payment deficits.
front-paged by afew
Another possibility (and the one I would favour) is to raise the inflation target to [maximum of current €-zone member's actual inflation rates for the three years prior to entry into the €-zone] + 2 % + [your country's intra-€-zone balance of payments normalised to GDP]. The first term in the formula is to ensure that no country is forced below the inflation rate that it would have had if it had pursued an independent economic policy. Different countries have different structural inflation rates, and it is always far less unpleasant to force your economy above its structural inflation rate than to force it below. The second term is there to leave some room for manoeuvre (every country will occasionally overshoot its inflation target and need to go below its inflation target in a following year to maintain its relative price level), and to make sure that any pressure that has to be exerted by the sovereign will definitely be in the upwards direction. The final term is there to insure against long-term internal current accounts imbalances, by forcing countries that run up an internal surplus to inflate their prices faster than countries that run internal current accounts deficits. Of course, you'll still have to do away with the GSP - that goes without saying, since the GSP is stupid under any conceivable institutional framework other than a commodity standard.
In the third place, even under the prevailing institutional regime the current crisis could have been largely avoided; the current problem is that the EUropean governments at all levels are populated by incompetent halfwit ideologues, who have drunk so deeply from the market-fundie koolaid that they are absconding from their duties to manage the political economy. Hardly a month goes by without one of our Dear Leaders expressing the sentiment that the international money markets know the value of the assets they trade better than the governments of the EU. Which, given the fact that "the markets" have been behaving like a ferret on crystal meth [alternatively, have been engaging in pump-and-dump scams], should tell you something about our leadership's willingness to suspend disbelief in the face of economic reality. Hell, our central banks even seem to have forgotten how to take a bankrupt bank into receivership.
With that sort of leadership, we're fucked. Common currency or no common currency.
Conversely, if the ECB leadership had been able to find their asses with both hands and a flashlight, they would have simply intervened in the secondary market, and everybody who was pump-n-dumping Greek sovereign bonds would have been burned. Hard.
So the € is not, in principle, a bad idea. From an economic point of view a common currency is of debatable value, given the inherent trade-off between inflation and the size and diversity of the currency union. But the € was never about economics anyway - it was always first and last a political unification project.
Which brings us to the way in which these crises are more important than meets the eye: What you are looking at here is not an economic crisis. The €-zone as a whole has no structural economic problem that it is not fully within the collective power of its members to solve. What you are looking at, in live coverage, is a constitutional crisis. The European Union is institutionally unable or unwilling to face up to the trade-offs inherent in being a continent-wide federation. Or, to put it a little more bluntly, this is a power struggle between a camp of "core" countries, led by Germany, and a camp of "peripheral" countries led by... well, nobody in particular.
On the "core" side, the objective is to be able to continue to dictate policy (economic and otherwise), both at the federal level and, through the combination of current accounts surpluses and a common currency, internally in the "peripheral" countries. A secondary objective being to ensure that the EUropean industrial policy continues to favour the incumbent firms (by making sure that the EU keeps prohibiting determined industrial policy), which are largely located in the countries in the "core" camp. On the "periphery" side, the objective is to claw back some of the political power that the "core" has arrogated (in some cases informally rather than through open and above-board treaty negotiations), including some way to industrialise on their own terms, rather than on German terms.
Now, the fact that the EU is going through a constitutional crisis does not mean that the EU or the € are failed projects. The EU is less than three quarters of a century old - most countries and federations have constitutional crises in the first fifty or sixty years after their first formal constitution. Constitutions are, after all, tricky things to write, and small oversights can create quite prominent unintended consequences (which the beneficiaries will, naturally, seek to hang on to). The US, at the equivalent point in its history, was fighting a civil war - and for all the venom unleashed in the present crisis, there is some way to go yet before Europeans start shooting at each other.
On the other hand, the fact that most successful states and federations have had constitutional crises does not mean that the EU or the € will necessarily survive this one. After all, most failed federations also had constitutional crises before (or when) they failed.
- Jake
