Saturday, August 30, 2003
Instapundit points to this article on France's deficit spending (How Bush-like!)
Telegraph | News | Eurofile: Chirac wants to get out of Brussels straitjacket
So instead of suffering for the common European good, President Chirac has decided to bust out, to let his deficits soar and try to spend his way to an economic recovery.
It is hard to know what lesson Sweden is to draw from this as it prepares to vote on Sept 14 on whether to start using the euro. Is every country that uses the single currency allowed to behave like this?
I must admit to a fair amount of ignorance concerning the implications of countries adopting "the Euro." Never fear. Solomon turns to his friend with a PH.D. in Economics.
Me: Isn't it a bit more than the color of your money? Once you join you're on the hook with everyone else's monetary policy...countries you can't control. So it's something of a question of: Do you trust them? Or doesn't it matter that much?
Solomonia advisor: EXACTLY! That's the whole issue. You are stuck with one central policy. If it suits the economic conditions in your part of Europe, wonderful. If not, uh oh! Having several different currencies tends to create automatic adjustment mechanisms (I says tends because it doesn't always work). If your country's economy is going down the tubes, then your currency depreciates. That helps you export. If your country is doing great, same deal in reverse: your currency appreciates and it slows you relative to your trading partners.
One currency, no adjustment mechanism.
Now, the US doesn't have individuals currencies for each state, either, but they have something else: fiscal policy. West Virginia is suffering? Then per capita they will have lower incomes, and pay lower taxes. That won't affect the federal-level social programs, though, and they'll get some help (at the expense of wealthier states).
Europe has no such automatic fiscal stabilizer.
So, the Euro replaces an automatic adjustment mechanism with nothing. Did they realize this? Yes, that's why there was a long adjustment period, during which each and every economy planning to join had to meet certain goals in their economies. The idea was that they would all have their economies in the exact same state so that their wouldn't be a need for adjustment within the group. Two problems: 1) they really didn't meet the goals, but they started up anyway because too much political capital had been invested in the plan; 2) even if Greece and Germany were in the same state today, it's a damn good bet they won't be there 5 years from now.
So the cost of the Euro is far more than one of simple adjustment from one money to another. This is not to deny the obvious benefits, foremost among them being the lower cost of doing transactions among the various countries. But in weighing the costs and benefits, the major factor in the former is a matter of monetary and fiscal policy.
