The Euro is so great – let’s have two of them
Daniel Korski 5:24pm
European leaders have now agreed to bail out Greece in a coordinated affair, involving the IMF and bilateral assistance. The Times has written this up as a grab for more centralisation of policy-making by European Council President Herman Van Rompuy, but even the Tories know that’s not true, as judge by William Hague’s calm remarks.
Trying to understand the problems of the euro has sent me back to my undergraduate economic textbooks and Robert Mundell’s work on optimum currency areas. As Spectator readers (many of whom are bankers) will know, the US economist theorised that a group of countries will benefit from a common currency like the euro if three conditions are satisfied.
1). The countries should not be hit by shocks that are too asymmetric: i.e. one country should not be substantially worse off while the other regions are booming.
2). There is a high degree of labour mobility and/or wage flexibility within the group of countries.
3). There is a centralized fiscal policy in place that will transfer money or other resources from countries that are doing well to countries that are doing poorly
The economic crisis has put paid to the first condition. Even though travel within Europe has been greatly facilitated by the creation of a single Europe, there are substantial barriers to the mobility of labour. Language and other barriers make it difficult for an Irish worker to move to Portugal and find a job with anywhere near the same ease that a displaced worker from Virginia can move to California and find a job. Furthermore, wage flexibility is hardly the word one would use to describe the state of the highly regulated, structural problems plaguing European economies. The powerful roles played by unions and the generally high level of wage regulations mean that European workers have some of the highest wages in the world.
Finally, there is no centralised fiscal policy for the redistribution of income and what was meant to substitute it – the Stability and Growth Pact – is irrelevant. It would be difficult to see how it would be politically feasible for the French government to raise taxes on its citizens and redistribute them to assist displaced Portuguese fishermen. As we have seen with the German reaction to the Greek crisis, transferring taxes inside the eurozone poses significant problems. In short, there were always serious doubts, according to economic theory, as to how successful the euro could ever be.
That said I don’t think there is any chance the euro will be abandoned. Nor that the Franco-German initiative for “strong co-ordination of economic policies" across the EU will happen. The two governments will struggle to agree on what this actually means or get the required treaty changed. Finally, a well-organised Euro-bond market is also unrealistic.
So what will happen to solve what economists call “indeterminacy”, the fact that the markets know that there are problems with the euro but European leaders have not presented them with a credible solution? One way out of the problem may be the implementation of a two-currency EMU, with both currencies run by the Frankfurt-based ECB. The Euro is so great, Europe may be lucky enough to get two for the price of one….
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ajs
March 26th, 2010 5:39pm Report this commentOh wicked. Two euros for the price of one. The original two-faced coinage.
paulg
March 26th, 2010 5:41pm Report this commentWhat a nonsense of an article, France and germany are corporate states, so the working of a free market are skewered for their workers.
Why should club med countries have their monetary policy controlled by the ECB in Frankfurt.
Maybe you should have took history instead as clearly your understanding of politics and economics don't inform your opinion.
strapworld
March 26th, 2010 5:50pm Report this commentMr Korski, I thought you wrote earlier this week that Merkel was under great pressure from within Germany against making the kind of move she made.
Are you like many commentators who write one thing one day and something completely different the next? If so may I suggest you join the Liberal Democrats as that is their forte'
Jean Monnet
March 26th, 2010 5:50pm Report this commentWhy is it that EU apologists are so allergic to reading the EU treaties? I preferred it when you were quoting FAZ journalists and then quoting accompanying FAZ leader columns without much in the way of acknowledgment. Anyway:
Try Article 123 from the Treaty on the Functioning of the European Union:
"Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as "national central banks") in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments."
Dr Cooper, I trust you'll apply the coup de grace.
Walsingham's Ghost
March 26th, 2010 5:51pm Report this comment"One way out of the problem may be the implementation of a two-currency EMU, with both currencies run by the Frankfurt-based ECB. The Euro is so great, Europe may be lucky enough to get two for the price of one…."
'Hello, is that Dignitas?...'
Rhoda Klapp
March 26th, 2010 6:04pm Report this commentAll those problems were pointed out at the start. What is happening now has been long predicted, even discounting the propensity of some countries to fiddle the figures. What we need is not two euros, but one per country.
TomTom
March 26th, 2010 6:11pm Report this commentGermany has gotten what France didn't want: the IMF involved. Sarkozy has to take on the former Socialist Finance Minister turned IMF Chief in 2012 Presdential Elections and is now having Merkel ram it down his throat.
France which thought it had a Southern European Axis to browbeat Germany into paying all the bills now sees Germany raining on his parade.
It could not be better. Merkel is highly unpopular and has no capital to waste on European politics especially when the OECD calls for Germany to raise VAT above 19% and abolish the 7% rate on books and presmably water and utilities.
Britain beware - VAT on books and newspapers cannot be far off - so much for R Murdoch charging for content !
Norman Dee
March 26th, 2010 7:40pm Report this commentWhat a good idea Rhoda, but I think you may have been beaten to it, when I go to Germany all the till receipts come marked in Euros but at the bottom they another number with DM after it ! What can this DM be ? I wonder. It's the same in France, but they have a different marking there it's FF, what can these codes mean ????
Moraymint
March 26th, 2010 9:38pm Report this commentThe fundamental problem here is not the currency per se, or whether Europeans "need" or one or two or fifteen variations of the euro.
The problem is that the EU is undemocratic, as was the USSR. Sooner or later, the peoples of the EU will rise up against the stifling politico-bureaucratic elite in Brussels and destroy it.
Hopefully.
2trueblue
March 27th, 2010 12:59am Report this commentMoraymint, hopefully.
Major Plonquer
March 27th, 2010 1:36am Report this commentI can see where this will lead. Why only have two Euroes when each country can have its own Euro? We can have the French Euro, the German Euro, the Greek Euro.
If this ever became the case I'd be all for a British Euro. So long as it had a picture of the Queen.
Tim Carpenter LPUK
March 27th, 2010 7:10am Report this commentWhy stop at one currency per country? The State/Superstate monopoly over currency should be ended and free banking made legal (i.e. independent currencies).
Of course the , £, DM, FF could exist as the "State Bank"'s currency, but HSBC, for example, could create their own too and the public/freed market will decide which are trustworthy. This will keep fiscal incontinence in check.
That said, this is another example of the Federalisation racket, er I mean ratchet. A disgrace. Brown will huff and puff but I think he wants it really, being an Internationalist and is looking for the right scenario to parade himself as saving the world again so he can gain a cosy sinecure for life inside the EU Bureaucracy.
If Cameron had any sense/neck/spine/cojones/ideological basis he would seize on this as a a "thin blue line" not to cross at any cost and if the EU tried to impose it, simply trigger a full IN/OUT referendum.
p.s. as with others, I am also disappointed at what appears to be the invalidity of a previous article re Merkel. I tended to take Spec articles as Kosher.
Cuffleyburgers
March 27th, 2010 9:54am Report this commentInteresting analysis, ridiculous conclusion.
What will actually happen is that there is likely to an armwrestling contest between the corporatist eu governments of france and germany, in which either the markets will win (because they've got the money) or else the governments will change the rules, but in order to do that "successfully" they would have pretty well to shut down the financial markets though excessive regulation, which would be economic suicide.
Either outcome bodes ill for the euro.
A good time to be on the sidelines, laughing as these hubristic clowns embark on an extremely slippery slope.
Hahahahahahahahahahah LOL
Daniel Korski
March 27th, 2010 10:05am Report this commentDear all
Some of you have high-lighted what you think is a difference between my previous article and this one. But I don’t see the problem.
Mrs Merkel had to bring in the IMF and forced an idea of coordinated bilateral assistance to Greece rather than an EU package - because Germans won’t wear more automatic integration. It was dressed up as "EU help" by the French, but in truth is was far less than Paris and Athens had hoped for. The terms imposed by Merkel mean the mechanism to help debt-ridden Greece could be activated only under strict conditions and would require the unanimous approval of the euro zone. As a result of her hardballing, she won widespread praise in Germany - because Germans are no longer automatic supporters of integration.
Where does that leave the idea of a European Monetary Fund, proposed by Wolfgang Schäuble, German finance minister? I am not convinced Mrs Merkel has not championed this as a distraction from dealign with Greece. As for Schäuble's motivation, it may be more real. Read this piece by John Wyles:
http://www.europeanvoice.com/article/imported/an-unrealistic-dream-/67439.aspx
But I dont see this going anywhere.
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