The euro was a mistake it seems. Is inflation the cure?

[Puppycow]

Euro Was Flawed at Birth and Should Break Apart Now

Since the launch of the euro in January 1999, Germany and the Netherlands have experienced a growth slowdown and loss of wealth for their citizens that would not have happened had they never joined the euro.

We know this to be true, because we can compare the progress of these two Northern European economies with that of Sweden and Switzerland, which kept their freely floating currencies in 1999 and continued to grow as before. Indeed, over the period of the euro’s existence, the German and Dutch economies have grown significantly more slowly than those of the U.S. and the U.K., despite the debt crisis now engulfing the “Anglo-Saxons.”

Sweden and Switzerland grew as fast or faster in 2001-11 as they did in 1991-2001. The German and Dutch economies, by contrast, not only slowed down in 2001-2011 (to 1.25 percent from 3 percent in the case of the Netherlands), they also suppressed wage growth to adjust for the effects of the euro. As a result, real consumer-spending growth fell to a feeble one quarter of a percent a year in these countries. A recent report on the Netherlands’ experience in the euro calculated that if growth and consumer spending had followed the pattern of Sweden’s and Switzerland’s in the decade from 2001, Dutch consumers would have been 45 billion euros ($60 billion) a year better off.

It seems there is indeed a major problem (or problems) with the euro, but I don't agree with the author's proposed solution (a simultaneous withdrawal from the euro) because I think it is unworkable. A much better solution IMHO would be to throw out the tight-money ideologues at the ECB, put in new people and give them a new mission and powers similar to those of other central banks like the Fed. The mission should be to balance between the goals of price stability and full employment, like the Fed's mission is. They should be free to buy up government bonds where necessary to stabilize the prices thereof.

It probably would have been better if the euro had never happened in the first place, but since it has, it is like humpty-dumpty in reverse: all the kings horses and all the kings men can't take take humpty-dumpty back apart again. But they could have a better monetary institution if they would stop focusing only on price stability and start focusing on growth as well.

 

[megaresp]

I think the problem is more complex. The "correct" solution for the German economy isn't necessarily what's required for Spain, Greece and Ireland. It's going to be very difficult (perhaps impossible) to find the "right" fiscal policy for the entire Eurozone.

 

[timhau]

Was the Euro itself the mistake, or was it letting some Mediterranean deadbeats into the club?

 

[jj]

Well, citing non-Euroness as a good thing kind of doesn't explain the UK.

 

[rjh01]

I think his reasoning is poor as his sample size is so small. He should be comparing every country that is in the Euro with every country in Europe that is not in the Euro. His conclusion that the Euro has major problems would be correct. The Euro is a good idea, it makes trade a lot easier. However a number of countries in the Euro have had major problems. Think Greece, Italy, Spain, Portugal. So, if nothing else, it does need reform.

 

[rjh01]

Well, citing non-Euroness as a good thing kind of doesn't explain the UK.

In any reasonable sample of countries, some will do poorly. The UK is one of them.

 

[WildCat]

Huh? Isn't Germany near historic lows in unemployment currently? They were between 9-10% throughout the 1990s.

 

[timhau]

Huh? Isn't Germany near historic lows in unemployment currently? They were between 9-10% throughout the 1990s.

They are, and the unemployment rate in Sweden is the highest of the bunch by a large margin.

 

[kevsta]

Huh? Isn't Germany near historic lows in unemployment currently? They were between 9-10% throughout the 1990s.

and this nails it, it's best for Germany and they have the most money and power in it.

everybody else can carry on borrowing (or getting bailout guarantees anyway) to sustain it for a little while longer yet.

 

[Puppycow]

Huh? Isn't Germany near historic lows in unemployment currently? They were between 9-10% throughout the 1990s.

This is not due to the euro but to labor law reforms I believe. In the 90s the labor market was too inflexible, but they have since relaxed the laws to make it easier to fire people (and hence less risky to hire them) and they are also encouraging work-sharing (cutting everyone's hours) instead of laying people off. This helps to mask the unemployment rate.

Regarding Sweden, the unemployment rate is 7.5%, which is better than the EU average. Germany's rate also looks set to increase in coming months:

"Soaring unemployment is clearly adding to the pressure on household incomes from aggressive fiscal tightening in the region's periphery," said Jennifer McKeown, senior European economist at Capital Economics.

She warned that the situation is likely to get worse and that even in Germany, where unemployment held at 5.7 percent, "survey measures of hiring point to a downturn to come."

 

[Moss]

Huh? Isn't Germany near historic lows in unemployment currently? They were between 9-10% throughout the 1990s.

Due to major investments by the state during the last economic crisis and by a huge redefinition of who counts as actually unemployed. The number of fully employed people is substantially lower as are the actual wages after inflation.

 

[Humes fork]

I know it would be a mistake for us to join.

 

[Tsukasa Buddha]

Heh, I remember when the Euro was destined to crush the USD a while back .

But it seems like the author in the OP is committing the correlation/causation fallacy. Was the monetary policy the only difference in circumstance between said nations?

 

[Puppycow]

Heh, I remember when the Euro was destined to crush the USD a while back .

But it seems like the author in the OP is committing the correlation/causation fallacy. Was the monetary policy the only difference in circumstance between said nations?

The problem in macroeconomics is that you can not do controlled scientific experiments so we either have to accept these sorts of imperfect anecdotal comparisons or throw up our hands give up on trying to understand macroeconomics at all.

 

[stilicho]

Euro Was Flawed at Birth and Should Break Apart Now



It seems there is indeed a major problem (or problems) with the euro, but I don't agree with the author's proposed solution (a simultaneous withdrawal from the euro) because I think it is unworkable. A much better solution IMHO would be to throw out the tight-money ideologues at the ECB, put in new people and give them a new mission and powers similar to those of other central banks like the Fed. The mission should be to balance between the goals of price stability and full employment, like the Fed's mission is. They should be free to buy up government bonds where necessary to stabilize the prices thereof.

It probably would have been better if the euro had never happened in the first place, but since it has, it is like humpty-dumpty in reverse: all the kings horses and all the kings men can't take take humpty-dumpty back apart again. But they could have a better monetary institution if they would stop focusing only on price stability and start focusing on growth as well.

This is again an argument that would apply equally to all currency standards and not only to those created through multinational agreements. We just had a thread regarding Iceland's currency and whether they ought to keep their own floating, adopt the €, or peg theirs to some other standard. Regardless how the issues are resolved, somebody's going to be unhappy and figure they had a better deal elsewhere.

I don't know why the author of that article is complaining. This is what he said ten years ago:

Analysts said the rally was set off more by doubts about the long term outlook for the US economy than by enthusiasm for the euro and the eurozone economies. "The dollar will fall much further," said Charles Dumas from Lombard Street Research. "The trade figures scored 10/10 on the economic misery index."

( Source : http://www.guardian.co.uk/business/2002/jun/21/theeuro.europeanunion )

The entire € zone suffers from a relatively strong currency position and that, in turn, hits export reliant members such as Germany and The Netherlands particularly hard. Withdrawing from the € might make that problem even worse for them.

 

[psionl0]

When are we going to get to the bit about how inflation will cure the problems with the euro?

 

[Eddie Dane]

We will not choose inflation for while yet, methinks.

Whenever I talk to Germans, I find they have an overly safety-concious attitude to this issue.

It goes something like this:
We can't allow inflation, we've been there. It leads to hyper-inflation. That leads to political instability. Instability leads to dictatorships. Dictatorships lead to genocide.

They have similarly over-the-top reasons for being afraid of nuke power.

Must be some kind of collective trauma, I guess.

 

[Puppycow]

Relatively Easy Solutions for Europe

1. A pro-exports tax swap in peripheral countries where payroll taxes are slashed and the money is made up with higher VAT.

2. A pro-consumer tax swap in the core countries, where VATs are slashed and the lost revenue is made up with a combination of bigger deficits and higher payroll taxes.

3. A higher inflation target from the European Central Bank.