|
A popular view these days is that the euro is a failed experiment because
economically and/or politically disparate countries cannot share a currency
without eventually bringing on a major crisis. Another way of expressing this
conventional wisdom is: a monetary union (a common currency) cannot work
without a fiscal union (a common government). This is unadulterated hogwash.
Many different countries in completely different parts of the world were able
to successfully share the same money for centuries. The money was called
gold.
The fact that a bunch of totally disparate countries in Europe have a
common currency is not the problem. The problem is the central planning
agency known as the European Central Bank (ECB), which tries to impose a
common interest rate across these diverse countries/economies. This leads to
even more distortions than arise when such agencies operate within a single
country (the Fed in the US, for example), which is really saying something
considering the distortions caused by the Fed and other single-country
central banks.
I'm reticent to pick on John Hussman, because his analysis is usually on
the mark. However, his recent comments on the Greek crisis and its supposed
relationship to a common currency make for an excellent example of the
popular view that I'm taking issue with in this post. Here is the relevant
excerpt from the Hussman commentary, with my retorts interspersed in
brackets and bold text:
"The prerequisite for a common currency is that countries share a
wide range of common economic features. [No, it isn't! Money
isn't supposed to be a tool that is used to manipulate the economy, it is
supposed to be a medium of exchange.] A single currency
doesn't just remove exchange rate flexibility. It also removes the ability to
finance deficits through money creation, independent of other countries. [Removing
the ability to finance deficits through money creation is a benefit, not a
drawback.] Moreover, because capital flows often respond
more to short-term interest rate differences ("carry trade"
spreads) than to long-term credit conditions, the common currency of the euro
has removed a great deal of interest rate variation between countries. [No,
the ECB has done that. In the absence of the ECB, interest rates in the
euro-zone would have correctly reflected economic reality all along.]
It may seem like a good thing that countries like Greece, Spain, Italy,
Portugal, and others have been able to borrow at interest rates close to
those of Germany for nearly two decades. But that has also enabled them to
run far larger and more persistent fiscal deficits than would have been
possible if they had individually floating currencies. [This
is completely true, but it is the consequence of a common central bank, not a
common currency.]
The euro is essentially a monetary arrangement that encourages and
enables wide differences in economic fundamentals between countries to be
glossed over and kicked down the road through increasing indebtedness of the
weaker countries in the union to the stronger members. [The
ECB, not the common currency, encourages this.] This
produces recurring crises when the debt burdens become so intolerable that
even short-run refinancing can't be achieved without bailouts.
Greece isn't uniquely to blame. It's unfortunately just the first
country to arrive at that particular finish line. Greece is simply
demonstrating that a common currency between economically disparate countries
can't be sustained without continuing subsidies from the more prosperous
countries in the system to less prosperous ones. [If this is
true, how did economically disparate countries around the world use gold as a
common currency for so long without the more prosperous ones having to
subsidise the less prosperous ones?]"
Money is supposed to be neutral - a medium of exchange and a yardstick. It
is inherently no more problematic for totally disparate countries to use a
common currency than it is for totally disparate countries to use common
measures of length or weight. On the contrary, there are advantages to the
use of a common currency in that trading and investing are made more
efficient.
In conclusion, the problem is the central planning of money and interest
rates, not the fact that different countries use the same money. It's a
problem that exists everywhere; it's just that it is presently more obvious
in the euro-zone.
http://tsi-blog.com/blog/blog-default/
|
