From the FT:
In any single currency area resources are always magnetised to the economically successful regions. To counterbalance this, political action is needed. Central government collects taxes from successful endeavours and redistributes resources to poorer areas.
This is not done just by regional aid, but by welfare transfer payments and paying the wages of public sector employees or building infrastructure. Were it not for this process, market forces would always tend to make rich regions richer and poor areas relatively poorer.
There are many examples where this... works well – in most developed countries – but there are others where it does not...
The implications of a single currency were understood by the leaders who formed the EU. The mistake was the euro’s premature introduction. The attempt to force political union before economic convergence and before populations were ready for it, has turned the euro from being an incentive to convergence, as was intended, into a powerful centrifugal force.
Not blindingly original, but a very good summary.
I suppose you could argue that it's not a problem if the wealth divide widens, which is fine for inhabitants (and esp. land owners) of the wealthy regions, but doesn't go down too well with people in the poor regions: they vaguely recognise that part of the increase in wealth in the wealthy regions was at their expense, and most of them wouldn't be prepared to move to another country or even to another part of the same country to try and catch up again, even if the wealthier regions welcomed them with open arms (which they don't).
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18 comments:
The problem with the Europeans is they take a top down approach to everything.
Things like markets and democracy where solutions and legitimacy emerge through competition and flow outward and upward are an Anathema to them.
I suppose its a historic legacy, popes, kings and queens, ect all things flowing downwards, now its technocrats, eurocraps and assorted corporate followers.
The main problem is it makes them quickly susceptible to ideology, as we have witnessed in the past and we are doing so now.
Regardless of our relationship to them is we have a right to expect them not to burn the neigbourhood down.
Here is an interesting view from the core.
http://www.klamer.nl/docs/euro.pdf
S, sure, the EU and the way the UK pol's impose it on us is awful etc, but this is a much narrower point.
For example, after 1990, there were huge, massive transfers of money from West to East Germany (most of which flowed straight back to the West, but hey) after reunion, which was of necessity also a currency union, but most Germans were reasonably happy with this because they have some sense of solidarity.
But most German voters wouldn't put up with similar transfers being made to Greece; and Greeks don't like seeing Germans become disproportionately richer, so the currency union is the seeds of its own demise.
It's not rocket science. Money has go round in circles if it's to do its job. At the moment the Eurozone's problem is that the money all tends to flow to the richer countries and stay there.
As the article says, we don't have that problem in Canada despite the fact that we have rich provinces (Alberta, Ontario) and poor ones (New Brunswick, Nova Scotia) all sharing a single currency. The reason being that the provinces negotiate an agreement for a transfer payment system to ensure that enough money flows from the rich provinces to the poor ones to offset the natural tendency for it to flow the other way.
The agreement has to be renegotiated every year or so to match the changing fortunes of each province, so for instance Newfoundland recently changed from being a poor province to a rich one as a result of offshore oil discoveries. But it all seems to work out. Mind you it's difficult to see how a similar system could be put in place in the Eurozone without the various countries losing even more sovereignty.
As Derek says, it's not rocket science. Most European countries are, in effect "single currency area"s and you only have to look at the last hundred years to see how resources have flowed from the poor parts of each country to the rich parts, Italy being an extreme case. It was obvious at its introduction that the euro was pushed through by the federalists for political, not economic, reasons, so I suppose they simply ignored the evidence and hoped for the best.
I am not sure about that mark, from the opinion polls ive seen the German voters seem to be going along with it.
And the Greeks too seem to be in some sort of euro Stockholm syndrome.
So i think the narrower point really matters. It seems to be the ideology that the EU and Euro has spawned has really taken hold. They are living in the model and cant think what it would be like outside of the model.
The eurocraps of course know this and will scare the sweet jesus out of them to keep them in.
I think it will fail because of the European social democratic model can no longer be supported fiscally.
Just wait and see the Spanish unions come out on the street as soon as a conservative starts doing cuts as opposed to a socialist doing the German bidding.
Thats what the eurocraps really fear, the street. I bet they wish they had worked out how to cancel Spanish elections before hand.
D, B, yes, more good examples. Or I could point to the fact that there's much more opposition in England to this overgenerous funding of S, NI or W than there is to similar transfers to the North of England.
S, you're missing the point. This currency union will be forced to downsize sooner or later for the reasons given.
The fact that the original intentions were malign (it was partly driven by investment bankers who could make money setting it all up, patching it up as it goes along, driving it apart by speculating and then charge even more money for unwinding it) is more or less irrelevant.
As you say yourself: "I think it will fail because of the European social democratic model can no longer be supported fiscally."
Part of the problem here is the refusal by inhabitants of poor regions (either of a particular country or of entire countries within the EZ) to devalue their currency. Greece could effectively devalue its “currency” while staying in the EZ simply by cutting all wages by 30% or so. Prices would in consequence fall by nearly as much because the bulk of the cost of stuff sold in Greece is attributable to the cost of Greek labour. Thus Greeks would not be much worse off. (The devaluation of sterling by 25% in 2008 has had a much smaller effect on UK living standards than the effect of austerity in Euro periphery countries.)
Organising this “devaluation” in periphery countries would be expensive and difficult, though the costs would probably be less than the current long drawn out austerity. Plus the devaluation would solve Greece’s lack of competitiveness problem.
Organising an effective devaluation of the currency of for example the North East of England is equally difficult, since numerous trade unions demand parity with wages in the South East.
In similar vein, I think East Germany paid a heavy price for adopting the Deutschmark immediately after unification. If they’d retained their own currency for a decade or so while they gained “competitiveness parity” with West Germany, unemployment rates in the East would not have risen so far.
What you are really arguing for is a free market in money. The (I think) Hayekian view that in order to sort out these imbalnaces and to keep money honest we need more currencies not less. In this way the North East could have 'Geordies' that compete with Welsh 'Taffies' or whatever.
I would just like to ofer my services for Suffolk. Our offices are in an ideal building for a business that issues its own currency. I'd call them 'Suffolks' or possibly 'Tractors'. Furthermore I would only be repeating and bringing up to date what happened in about 1820 - coin minted for a local trading business (a hardware store I think) have recently been found. It worked then. It'd work even better now with 'puters and eyefones.
Mind you the HMRC and the State would absolutely hate it. The people, once they'd cracked it, would absolutely love it.
And, the other majorly beneficial effect would be to force the State into LVT as the only certain way of being able to collect any tax at all.
Bring it on...
These currency transfer also have the problematic effects of subsidy. for example state run schools turning education into a mere creche for left indoctrination. Or the governments treatment rationing service the NHS being a financial incentive to not monitor your health.
AC1
"In any single currency area resources are always magnetised to the economically successful regions."
I'm not convinced. Surely wages should be lower in those less successful regions, meaning that investment will flow there?
This is, after all, what is happening with China - they are artifically tying their currency to the dollar, and resources are flowing from the US to China.
RM, yes to all of that, but as we know, people are very sensitive about nominal wage cuts and not so sensitive about currency devaluations.
With East Germany, the West German politicians foolishly promised to exchange 1-for-1 long before reunification and that was a done deal, what East Germans didn't realise was that this applied to liabilities as well as assets. It was increasing the liabilities of East German industry ten fold overnight which caused the real damage (East Germans had relatively little in nominal savings, so for them it was a bit of free money, big deal).
L, I'm not really arguing for anything, I'm just saying that as a matter of fact, the maximum size of a currency zones is limited to an area where there is some sort of sense of national or collective identity and hence a willingness to accept transfer payments from rich to poor areas. And whatever kind of tax we collect (LVT being the best) there still has to be acceptance that it goes into 'our' national pot.
AC1, yes, that compounds the problem.
AC, I was quoting from the article.
But I could argue that your example shows/proves that China is economically more successful than the USA. The USA and China are effectively in the same currency zone and hence investment in industry flows from USA to China and subsidies/soft loans/cheap goods flow in the other direction.
For 'China and USA' read 'Germany and Greece'.
And of course wages in China are low, that is because half the population is enslaved by the other half, but viewed from the outside and ignoring human rights abuses, China is very successful economically.
"And of course wages in China are low"
But low compared to what? Yes, they are low compared to equivalent wages in the West, given the official exchange rates on the currencies, but are they low compared to the price of food, accommodation and manufactured goods in China itself?
B, good question. I'd guess they are, what do you think?
It probably boils down to aspirations. Just as out grandparents' amazing luxuries are today's essentials, yer average Chinese peasant/worker has a standard of living that is OK by (Chinese) historical standards (somewhere to live, enough to eat, state healthcare etc etc), but really crap compared to what the newly affluent middle classes can afford. All of which would mean that China soon will not be a low-wage economy any more, but I don't really know much about what goes on in the PRC....
For an optimum currency area to work requires some mechanism to recycle imbalances. If the members of a monetary union do not converge, then trade imbalances are inevitable. It is the trade imbalances that need to be balanced.
The euro periphery diverged from the core rather than any convergence after the introduction of the euro. When the euro periphery were running increasing trade deficits with the euro core (Germany)someone in the euro periphery had to be taking on debts to finance the trade deficit. Greece and Italy the debts were on the government. Ireland and Spain the debts were on the household and corporate balance sheet. The sovereign debt market in Greece and Italy was recycling the trade imbalances back to German and French banks in the form of bond promises for goods and services already delivered. So that really was how transfers were already happening. Until, of course, that mechanism broke down and people stopped buying Greek bonds. Without some other means of transfer such as EU or IMF, Greek society would implode even more than it has.
Germany wants to continue running a trade surplus with the periphery because that makes them feel virtuous. However, a trade surplus means you will be exporting capital and accumulating claims on others. At the same time they want the periphery to stop building up debt, which they can't so long as they have a trade deficit. The trade deficit will mean they are importing capital either as sovereign debt, household debt through the banking system or corporate debt. Recycling the imbalances is breaking down as the EZ banking system stops lending to each other and the sovereign debt market yields go through the roof. The ECB have stepped in to cover for the dysfunction of the system and are effectively holding the whole thing together. Rather than private banks doing it, they are taking money from the Bundesbank and giving it to Greek and Irish banks etc.
Even in an optimum currency area like the sterling zone, trade imbalances between different areas tend to be balanced through the banking sector. However, by far the biggest balancing is through transfer payments and public spending etc. The European monetary union lacks the mechanism for a fiscal transfer union even if there was a political will. Pay tax so we can send it to Club Med is not a good campaign slogan for northern European politicians. Moreover, send large dollops of funding and they will never reform their economy.
The EMU could work in principal if they converged. Convergence would see the trade imbalances reducing and less recycling being necessary. However, that would take a decade plus of their current austerity. It will all fall apart before convergence.
B, we're sort of drifting off the topic of currency unions, aren't we? The human rights abuses that go in PRC (including economic exploitation) are probably beyond our comprehension, but in turn, it's not as bad as in N Korea or a whole host of Arabic or African countries.
Err, principle.
R, that comment was fine, I didn't notice "principal" until just now.
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