I write this realizing that the dominant reaction might be, “That won’t work.”? Well, I toss out ideas on things like this because they *might* work, amid a situation where things are ugly, and real solutions aren’t appearing.? If you explain to me why it won’t work, that will help me do better in the future.? I don’t respond to all comments due to time constraints, but I do read all comments and I consider them.
We have a lot of problems in the world today, but the one that is the most volatile at present is the Eurozone. The Eurozone has issues, because tries to have one currency across an area where levels of productivity, retirement policy, regulatory policy, etc., vary considerably.
The goals of having an “ever-closer union” are perhaps desirable, if naive. Two can only walk together if they agree on underlying issues — with 17 nations, it is far tougher.
The first step toward a solution, given that all nations have fiat currencies is to acknowledge that you made a mistake in creating the Eurozone.? If you are going to have a fiat currency, you should have some form of taxation authority behind it, and that is not true in the Eurozone.
The second step is to re-introduce individual currencies for each country in the Eurozone.? A Euro would be defined as a weighted average? of the individual currencies in the Euro; the initial weights would stem from the percentage of GDP for the Eurozone as a whole.? Local currencies would be used for local transactions, but the trade in currencies and Euro arbitrage would result in changes in the trading values of the local currencies.? Quarterly, the value of a Euro relative to the local currencies would be redefined by the percentage of GDP the country has compared to the whole of the Eurozone.
The third step is dealing with bankrupt nations.? Solvent nations should not bail out bankrupt nations, but instead, bail out local financial institutions with assets from bankrupt nations the right way — wipe out common and preferred shareholders, and junior debtholders, and make senior debtholders take a haircut.? Protect depositors, but others in the capital structure lose.
Fourth, when things have normalized, take Euros, and force an exchange into the underlying currencies.? The Eurozone is gone, and all of the problems that it created.? Send the Eurozone to the ash-heap of other currency unions; they don’t work.
There will be some complexity here, but the need to undo a major policy error — creating a common currency when there is not a common government, is a significant matter, and the effort to unwind the mess should be pursued.
And now, you can tell me why this won’t work.
Because reintroducing currencies takes a lot of time, a precious commodity there is little left of with bond yields hitting new highs, and Italy next up.
In the thick of battle a master at strategy (Napoleon) was said to have said to a general asking for more troop reinforcement, “I’ll give you anything you want, except time.”
That’s fair; that said, from the beginning of the crisis, and even from the start of the Eurozone, the EZ took actions that I thought would not work.
I even remember discussing it w/Steve Hanke back in 2002…
I couldn’t begin to figure out why this could or couldn’t work.
I have a question relating to the Eurozone and the idea of history rhyming:
What is happening in the Eurozone looks a little like what happened in America between 1783 – 1790 with the Articles of Confederation. A weak central government without the power to tax trying to oversee basically sovereign States leads to … a mess (and that’s even with a more common starting point politically than Europe had). Our current constitution with a much stronger national government (that can tax) and Hamilton’s nationalization of the states’ debts help stabilize the economy.
I wonder: is that an appropriate analogy / historical time frame to look at for the current woes? Would anything be gained now by studying what happened then?
I thought of this only after I heard of “Eurobonds” which sound a lot like Hamilton’s debt nationalization. But it really doesn’t look like Europe will follow the U.S. toward much tighter political union- the local subcultures are just too different (and each with their own long, grand history).
Yes, that’s a fair analogy, except that the US states were much more homogeneous than members of the Eurozone. Assumption of the state debts is similar to Eurobonds.
Eurobonds by themselves are not enough; many things would need to be lined up to make the Eurozone financially stable. Bank regulation, capital rules, deposit insurance, etc.
The Eurozone either has to centralize or decentralize. In this case, the middle is not stable.
I think you have the policy error aspect upside down.
The very point of the euro, wasn’t, for its founding fathers, primarily economic, it was precisely just a tool to facilitate further political union later on. The way European politics has worked since the 1950s is to create mechanisms that are easy to bootstrap, but, some years later, will unavoidably have issues where the most obvious way forward is greater collaboration. That the Euro now requires political union is not a bug, it’s a feature. Policy failure would have been if the euro had worked out without requiring political union!
You may argue that political union won’t work, but ultimately it is simple: it will work if people want to. Most countries are accident of histories that happened as a combination of chance and people willing enough to live together. They often are not that homogeneous internally (is India more or less homogeneous than the eurozone? Should it be disbanded as well?). So what we need to know is whether people of the eurozone want to live together. The political consensus seems strongly yes — people opposing political union are relegated to fringe parties. There’s lot of disagreement on the petty details, but nobody (in or near power) is interested in, or has a mandate for, disintegration. Where there’s a will there’s a way, so the petty details will be agreed on one way or other.
When government laid down a new policy, everyone will say “it won’t work”…. Why not try it first and then that is the time they could tell that it will not work…. right??