Posted by Andrei Tuch Feb 16th, 2009 | 14 responses
...just as accurate.
The Eurozone states have run up huge
public debt, and they’re barely managing to pay interest on it. Conventional economic theory suggests that there are only two ways to pay back the principal of such an overwhelming burden:
savings during boom years, or
devaluation. Since they spent the good years borrowing, it’s unlikely they will do anything else once this crisis is over. On the other hand,
the ECB has been printing Euros all through the crisis, and there’s no suggestion of them stopping. Meanwhile the
Maastricht criteria for accession to the Eurozone are strict enough that any prospective applicant will have to have been quite prudent with their national finances.
The question is: shouldn’t the more developed member states keep their currency, so as not to be dragged down by the Euro’s troubles?
The answer is: No. But not because the national currencies are strong; rather, exactly because the Euro is weak.
The prospect of the Euro devaluing against a national currency is only a concern for countries with the sort of financial discipline and overall stability that lets them keep up the value of their own money; if both currencies get devalued, it doesn’t really matter. (For the purpose of the argument, let’s ignore the fact that devaluation will almost certainly mean the kind of inflation that puts the applicant outside the Maastricht criteria.)
High-denomination Euro banknotes in circulation, in millions.
Devaluing a national currency makes exports cheaper, but imports more expensive, so most people can only afford local products.
The idea is that this builds up a base of manufacturing facilities and capable workers, as well as attracting foreign investment. But for devaluation to be a useful solution to an economic crisis, you need to be able to feed yourself. If your own agriculture and industry can support your population, then it will suddenly get a reliable set of buyers (they won’t turn to imported products), so you can make long-term plans, invest in equipment and training, etc. The fact that public debt is then easily paid off is an excellent bonus - but if you devalue without being able to sustain yourself until your economy is once again strong enough for imports to be affordable, the country as a whole is not going to get any use out of crashing the currency.
And for the new member states, standing alone is unlikely to have any benefit either. Because we’re all in this together, the entire European Union, for better or worse. Every country that has made a decision to join, did it because it wanted to pull itself up to the European living standard. The successful ones did it not just through infrastructure subsidies, but through attracting investment from Western Europe: we made ourselves part of the European market. We may use our own currencies to pay for groceries, but the companies we work for sell their product for Euros. These days, in IT and other industries where keeping qualified employees happy is important, you will often see salaries established in Euros, or a contract clause saying that if the national currency gets unpegged from the Euro, your wages are automatically adjusted at the new rate. The difference between the Common Market and the Eurozone is increasingly academic.
In Estonia, prices have been double-marked in Euros for years.
Ultimately we come back to “strength in numbers”. If the economic crisis really is going to devour us all, and if the spine of the EU is cracking under the burden of
massive public debt, then staying out of the Eurozone will not help member states avoid disaster. Forget about direct investment; revenue - even payroll - is going to dry up. Even in the worst case scenario, we will be far better off as part of an isolated, devalued, hyperinflated market of nearly half a billion consumers, than a clever and prudent loner.
The global economic crisis is showing us that there really is no such thing as “too big to fail”. But ironically,we would rather fail together than fall alone.
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One curiosity while speaking about eurozone is that Euro is official currency in Montenegro and Kosovo province - even they still are far away of joining EU.
Yes - and Andorra, Monaco, etc.
An informed reader would find your exposé not the least refreshing. Original arguments are few and paraphrases of popular notions are aplenty, thereby qualifying your rhetorical style as pretentious. The article is peppered with grammatical mistakes, in some cases distorting the meaning of a sentence. An inexcusable flaw.
Bold criticism from an anonymous poster. Perhaps you would care to expound on my shortcomings specifically, if not provide your own superior product for comparison?
An example of lexical error would be the use of the word “anonymous”. In English, anonymous means you don’t know my name nor my email. “Bold” implies that you think you’re above criticism, which you are clearly not unless I transcend humanity, which I assume you will not agree on. “Oh yea, can you do any better?” does not constitute a respectable winning argument, and lastly, “Ring Ring, The Economist called and they want their badly plagiarized article back.”
No, I don’t actually know your email - you chose not to reveal it publically; and anonymous means lacking individuality, unique character, or distinction, which seems to apply.
“Can you do any better?” does constitute a winning argument against someone who poses no arguments at all except “you’re stoooopid!”. (And if The Economist wants to talk to me, they have my number. Except The Economist actually knows the definition of plagiarism.)
PS. I don’t at all think I’m above criticism, but it is fairly obvious that I’m above yours.
I doubt The Economist has ever dealt with dilettantes such as you, and they sure as hell don’t have your number now that you’ve told Ed Lucas to fck off in your blog.
Hilarious, since there’s actually a reply from Ed Lucas himself in the comments to that post.
Hilarious, since even that does not seem to be helping your plummeting score. Buh-bye iPhone.
It all a very- how to tell – a intersting but I feel so so many hatred and anger here. Andre, you seems to be a very sad person. Have you recently lost something very precious to you, maybe your hourse or job? Maybe you have a bad person? Takes care, allright? xoxo
Ooh, more anonymous trolls! My score may be plummeting, but it does seem like I’m by far the most popular poster on TAI at the moment. Thanks y’all!
I figure Gerardo-Sylvie-José are one and the same unisex troll, plumbing the depths of negativity while oblivious to substance. Well, they’ve got to practice their Eurenglish somewhere while jumping on someone else’s coat-tails.
A devalued currency might be valuable to exporters trying to capture market share but not for workers who expect a fair price for their labor. German and French workers who labored hard to save their Euros are getting screwed by the PIGS profligate(http://dictionary.reference.com/browse/profligate)ways! No wonder they are furious! But tell me again why are the Greeks are rioting…because the German and French taxpayers are loaning them yet more money without asking for some small assurance they might some day get some portion of their money back?
Again I ask with the way the Euro has been going do countries like Estonia really want in? Germany and France might indeed be better off seeing if Estonia would let them into the Kroon instead!
The European Union needs to rethink itself. Is it even possible to form an economic union with a common currency without some kind of accompanying political union or oversight? Can you form a club without minimal entry/membership rules/requirements and expect very high standards? Perhaps some set of shared values should be a pre-condition? Or at least some safeguards to prevent abuse? Is a “unified” Europe really even possible?
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