Wednesday, August 12, 2015

Is the euro responsible for the eurozone's problems?

"Wir sind gefangen im Euro und müssen das Beste daraus machen." ("We are trapped in the euro and we have to make the best of it.")

So declares Mark Schieritz in Der Euro – eine Antwort auf Gustav Horn und Martin Höpner Die Zeit 11.08.2015. This is a follow-up to a set of articles:

Mark Schieritz, Friedman hatte recht Die Zeit 30.07.2015

Gustav Horn, Es ist der Neoliberalismus, stupid! Die Zeit 31.07.2015

Martin Höpner, Man hätte den Euro niemals einführen dürfen Die Zeit 10.07.2015

Gustav Horn, Der Euro als Sündenbock Über gesamtwirtschaftliches Denken und Handeln 10.08.2015

Schieritz in the earlier article notes that economists, including the monetarist conservative Milton Friedman, had warned that the design of the euro was deficient. They were basing their cautions on "optimal currency area" (OCA) theory.

Robert Mundell defined a currency as "a domain within which exchange rates are fixed." ("A Theory of Optimum Currency Areas" American Economic Review 51:4 Sept 1961)

The dollar is the currency for the entire US, neither Mississippi nor California nor Indiana or any other state has its own separate currency. A dollar from Mississippi is valued at exactly one dollar in one state as another. Prior to the crisis of 2001, Argentina had its currency pegged to the dollar, i.e., a fixed exchange rate. This arrangement functions in the same way as a single currency within a country, except it's easier to withdraw from, as Argentina did in 2001.

Schieritz passes this judgment on the euro after Germany's humiliation of Greece in this year's negotiations:

Die vergangenen Wochen haben gezeigt: Friedman hatte recht. Der Euro ist vielleicht eine der größten wirtschaftspolitischen Fehlentscheidungen des vergangenen Jahrhunderts – und wenn nicht schnell etwas passiert, wird er Europa zerstören.

[The past weeks have shown: Friedman was right {about the dangers of the euro currency zone}. The euro is perhaps the biggest mistaken economic-political decision of the past century - and if something doesn't happen soon, it will destroy Europe {i.e., European unity}.]
And he describes some of the deficiencies of the real existing eurozone:

Seit die Menschen von Helsinki bis Lissabon mit dem Euro bezahlen, schwanken in Europa zwar keine Währungen mehr, dafür schwanken jetzt ganze Länder.

Das liegt auch daran, dass die Währungsunion für die meisten ihrer Mitgliedsstaaten eine ökonomische Zwangsjacke ist. Sie schränkt – die Griechen erfahren es gerade – die nationalen wirtschaftspolitischen Reaktionsmöglichkeiten ein, weil die eigene Währung nicht mehr abgewertet werden kann, um die Wirtschaft wieder auszubalancieren. Auf der supranationalen Ebene wiederum fehlen die Instrumente, um dieses Defizit auszugleichen. Es gibt eben kein gemeinsames Budget, aus dem sich Krisenstaaten bedienen könnten, um einen Konjunkturabschwung durch Mehrausgaben abzufedern. Die europäischen Haushaltsregeln mit ihren Schuldengrenzen legen der Finanzpolitik in den Mitgliedsländern stattdessen sogar noch zusätzliche Fesseln an. Die Währungsunion, so formuliert es der dänische Wirtschaftswissenschaftler Lars Christensen, sei ein monetärer Strangulationsmechanismus".

[Since people from Helsinki to Lisbon have been paying with the euro, no European currencies have wabbled, but instead now whole countries wobble.

It also has to do with the fact that for most of the member states, the currrency union is an economic straightjacket. It shrinks the possible national economic policy reactions - the Greeks are already experiencing that - because their own currency can no longer be devalued in order to rebalance the economy. And there is no common budget from which the crisis states can be served in order to smooth out conjunctural downswings by higher outlays. On the contrary, the European budget regulations with their debt limits even put additional constraints on the member states. As the Danish economist Lars Christensen puts it, the currency union is a monetary strangulation machine.]

Schieritz sees the collapse of the eurozone as a world-historical magnitude catastrophe. Because he assume it would cause the collapse of the European Union.

But the solution he proposes is, as he admits, a fairly modest step in comparison to the diagnosis. Which I suppose is part of the point. He stresses the importance of a full banking union, which is certainly a necessary action. But he also doesn't seem to fully appreciate the disaster of austerity policies during a depression.

Gustav Horn in the later piece cited above tries to put Schieritz' position in the same category of that the euroskeptic conservative economist Hans-Werner Sinn. And Horn seems to think that the effects of a currency zone on forcing real deflation via reduction of wages, salaries and living standards in the lower-productive parts of a currency zone just don't exist.

In the earlier article, Horn argues that neoliberal policies are the problem, not the euro itself. But without realizing the problematic aspects of the current euro structure such as those Schieritz identifies as quoted above, growth policies won't in themselves solve the chronic problems in the longer run. And in the later article, even his argument about neoliberal policies being to blame seems hardly to figure.

Martin Höpner rather nonchalantly suggests that the current eurozone members should go back to the pre-euro adjustable exchange-rate system without addressing what a potentially disruptive step that could be.

Schieritz rightly criticizes him on that point. But he also uses the dramatic quote that opens this post, "We are trapped in the euro and we have to make the best of it," as part of making that point. I'm leery of this argument, just as I'm leery of minimizing the potential disruption of ending the currency zone. That's a nice Mugmump position that doesn't in itself say much. But I have the Greek experience in mind. To make their negotiating strategy of earlier this year work - achieving an end to austerity while staying in the eurozone - could only have been achieved if they were ready to actually leave the eurozone. Alexis Tsipras' government, rightly or wrongly, considered that it would be worse to leave the eurozone than to accept the drastic austerity measures that they actually did. They had a tough call to make. But at best, it's a questionable assumption to assume that leaving the eurozone would be more catastrophic than an interminable depression.

Schieritz understandably dismisses Horn's position that whatever currency stability the euro gave to the eurozone was more constructive overall than whatever would have happened if each country had still had its own currency whose exchange rates could have been adjusted.

Paul Krugman just did a post that brings into question Horn's argument in particular about the superiority of the euro to separate national currencies, although that's not specifically what Krugman is addressing here. He is looking at the growth rates of France, Japan and the United States for 1990-2014. And he uses the comparison to raise questions about a central tenet of the neoliberal gospel, the critical importance of international competitiveness:

What this tells you, I think, isn’t just that international competition is far less important than legend has it. It also suggests that economic growth is pretty insensitive to policy: France and the US are at the extremes of advanced-country regimes, yet there’s not much difference in their long-term performance.

But does this say that policy doesn’t matter? Not at all. For while there is not, repeat not, anything like the zero-sum competition among nations so beloved of business types, there really is the question of who gets the gains. U.S. economic growth has been OK these past 25 years; US family incomes, not so much, because such a large share of growth goes to the very top.
And he follows up with this striking closing sentence, "International competition is a mostly bogus notion; class warfare is very, very real."

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