It is time to stop quivering in our boots in pointless fear of the future and just roll up our sleeves and build it.
- Ray Pierrehumbert

Wednesday, September 28, 2011

Shoulda Toljaso

I don't know if I'm on record at all about this, but I always thought the Euro was a crummy lousy stupid idea for the Europeans.

My reasoning is that of Jane Jacobs, in Cities and the Wealth of Nations: "Jacobs makes a forceful argument that it is not the nation-state, rather it is the city which is the true player in this worldwide game." as Wikipedia has it. But a lot of people miss the real upshot of that treatise, which is that for every currency, a dominant city tends to emerge.

This has been somewhat masked in the United States, with its immense mobility and uniformity. It has been difficult for one region to come to dominate the others and thus benefit from the revaluing of the currency (down at times when the dominant city is relatively weak and up when it is strong). In Canada and Mexico, as in non-Euro Europe and elsewhere, the emergence of a dominant metropolis per currency has been obvious.

In America, the whole Northeast from Chicago to Boston to Washington forms a single metropolis with great mobility. Its only obvious competitors have been the two California conurbations. At this point, as commodities become dominant, the Texas triangle (including all five big cities) may emerge as the winner. But the game is still on.

In post-Euro Europe, the Ruhr Rhine valley has always been a contender for dominance. The value of the Euro is thus set high because of the success of Germany. This strangles the Mediterranean, which is prevented from devaluing its currency and thereby promoting growth of local industries.

The absolute ungovernability of the Euro zone just means that the dysfunction of the USA as a modern state has been inherited by the United States of Europe. It's cargo cultism: the advantages of the USA can never be implemented in Europe because of the plethora of cultures and mores. The Euro zone never made much sense, except as an effort to replace the dollar as the reserve currency of the world, which never happened, and as it appears now, a good thing.

The Euro treaty should be unwound, and local currencies re-established in Europe to re-establish quasi-normal economic activity for a while. Is that a good idea? I think it's better than trying to glue together something which can't function properly as a whole. And in the long run, Europe's multiple currencies present a huge competitive advantage on Jacobs' theory.

America, however, should not opt for fifty statewide currencies. America has an advantage in its capacity to inflate its way out of debt. That America has not eagerly opted for as much inflation as it can swallow is another aspect of its political confusion these days as far as I can see. Nobody else has their debt denominated in their own currency! Plus, inflation would greatly untangle the real estate mess, as the real value of the debt will shrink relatively quickly.

I must be wrong, of course. I can't possibly understand these things better than everybody else. So I'm open to being set straight...

22 comments:

James Annan said...

While I don't disagree, I would put it differently. It is not that a dominant city just emerges of its own accord, rather that policy decisions are made based on the interests of the capital city.

At least, that is how it always seemed in Scotland and the N of England, when high interest rates were being used as the weapon of choice to rein in some utterly distant and irrelevant house price bubble in London, meanwhile causing economic ruin in what remained of the manufacturing zone.

One reason some Scots favoured joining the Euro was specifically to rein in the London-centric approach, on the grounds that we have more in common with the rest of Europe than the SE of England.

Yes, inflating your way out of debt is a great way of rewarding those who over-borrowed at the cost of stealing from those who didn't. Moral hazard anyone? Of course this is the current UK fiscal policy, albeit unstated.

William T said...

"Nobody else has their debt denominated in their own currency!"

I don't think this is true. THe governments of most "rich" countries sell bonds in their own currencies.

Gravityloss said...

Do you know why the Euro was created in the first place?

One big reason is that, small currencies are unstable and prone to external pushes, even by rich individuals like George Soros.

EliRabett said...

FWIW, Rhein-Main (Dusseldorf to Frankfurt and if you want throw in Rotterdam) would be a better analogy. The Ruhr is home to some of the most decayed industrial wastelands in the world (the Ruhr valley itself is very pretty, but the industrial landscape and joblessness north of the valley has been bitter for many years.

As to what the Euro did, is that it expanded the markets inside Europe so that people could buy stuff (Internet or on foot) without paying a tax to the banks for exchange, and that was/is no small thing.

Steve Easterbrook said...

Currency speculation is now the province of a whole bunch of wealthy gamblers. I lived through several runs on the UK pound in the 80's and early 90's, in which the government ended up handing over vast sums of tax payers money in a vain attempt to outspend the gamblers.

The only way to prevent these kind of speculative attacks on the fiscal policies of governments is to either tax currency transactions (e.g. the Tobin tax), or to prevent them altogether through a unified currency.

Small countries no longer have any way to control their own currencies, so your suggestion of breaking up the unified currency won't do what you'd like it to do.

Gravityloss said...

So can please the american and british eurobashers at least take these few basic points from the comments here?

Are you capable of listening?

I'm sick and tired of hearing all this oversimplified "analysis" over and over again...

ICE said...

I never understand why so many americans look down on the euro (the currency and/or the notion of the European Union as a whole, broadly speaking). You ~saying "the euro was meant to replace the dollar' might give a hint as to why that is - the euro as a threat to the american monetary and political leadership - but I dont think that was ever the case.
One can argue that the european construction has been poorly managed, granted, or that we lack proper political leadership in the current crisis - but saying the euro zone didn't make much sense in the first place is a little over the top I think.
As for countries differences, well, there are indeed cultural differences, but in terms of political and societal model/values, I think a number of european countries at least have much more common ground than, for instance, Vermont and Texas. Obviously the problems lie more in the differences in economic development (North/South).

Finally, I think you hugely underestimate the damage, economical and political, of a break-up of the Euro zone, which BTW would go international (hence US pressure on Europe to solve the crisis). One UBS analysis put it as high as 25% of GFP for Germany for instance (see M.Wolf in FT)

Michael Tobis said...

Noted.

I like the idea of a Tobin tax. (If my name is going to be confused with other names, it might as well be someone I approve of.)

A common bank could have been set up to resist speculative fluctuations. (In fact as I understand it the national banks do cooperate on this.)

There are plenty of other ideas besides creating a unified economy, which reduces redundancy as we now see. Who could have imagined that French prosperity could be threatened by the balance of payments of Greece or Portugal?

Of course, a unified economy and various non-unified sovereignties, cultures, and mores, clearly is unworkable.

Europe will have to further unite or re-divide. Most people I respect seem to prefer the former but I don't see it as practical for the reasons Jacobs elucidated, which seem to be less compelling to others than to me.

Michael Tobis said...

"Sick and tired of hearing oversimplified analysis" is the motto of our times.

Each of us has to make sense of the world based on what we know. Since none of us knows everything, nobody has a fully realized fully competent conception.

As I said, I am looking for correction here. I don;t entirely trust my thinking.

That all said, I haven't really seen anyone who understands Jacob's argument that currencies should be local (and small) who has refuted it.

It's interesting that she left the US to live in Toronto, unambiguously the leading city in Canada.

(For myself, I prefer Barcelona over Madrid, Montreal over Toronto, New Orleans over Houston. I think the second city tends to be the more interesting and fulfilling place, as the most extremely ambitious will happily remove themselves and more room is left for personal expression and self-realization... But that's another story.)

I cannot imagine the practicalities of a common currency suddenly being abandoned. I am sure it is a bad idea for it to happen under circumstances like the present ones.

But I think individual countries would be well advised to consider pulling out once the crisis is somewhat abated.

The counterargument seems to be that there are super-rich who can cause major disruption to minor currencies. But apparently the unified currency distributed sovereignty solution causes bigger problems than the problem it is intended to resolve.

Ondřej Čertík said...

While I quite fundamentally disagree with most Michael's blogposts, I do agree with this one.

Euro was a bad idea from the beginning and there were people who were saying that up front, for example the Czech president Vaclav Klaus: you can't have monetary union without fiscal and political union. More details for example here (in English):

http://www.klaus.cz/clanky/1624

it's from 1999, but obviously, it applied then and it applies today just as well.

So there are two options: either dismantling euro, or getting a political union.

USA is one nation, Europe is not. It's as simple as that. And so creating a political union, with European government, will simply not work, because, historically, such things only work for one nation (like the USA).

Michael Tobis said...

Apparently I agree with Vaclav Klaus on something. That's disconcerting.

guthrie said...

The euro is a perfectly good idea, just ahead of its time. The point being that the individual economies need time under some sort of somewhat free market capitalism to come into equilibrium, to similar levels of development. It is pretty obvious that Spain, Greece and Ireland and others were still comparatively less developed to modern capitalist standards, and therefore coralling them in a single currency is foolish since it takes away the local flexibility necessary for development.

David B. Benson said...

I previusly posted "For the Common Good" so I won't do it again.

The current situation favoring so-called free trade has led to the situation described in "The Wrecking Crew" and moree recently in "Boomerang". Read at least the latter before commenting on the (un)vertue of the Euro.

(I too seem to agree with Vaclav Klaus. There must be more commonality than mere a currency. Supergreat depression, anyone?)

ICE said...

"That all said, I haven't really seen anyone who understands Jacob's argument that currencies should be local (and small) who has refuted it."

yes, from Wikipedia and what you're saying I don't really understand it. Is it that areas corresponding to the leadership of one big city should have their own currency ? in which case it would seem a bit of a circular argument to me, since most countries happen to have their own currency, and also happen to have a leading urban area somewhere...
I note that theories apparently exist on what is the Optimal Currency Area.
http://en.wikipedia.org/wiki/Optimum_currency_area
According to which Europe doesn't seem to be optimal - nor the US...

"The counterargument seems to be that there are super-rich who can cause major disruption to minor currencies."
Come on. Dont misrepresent what other people said. There are credible reasons the euro was created (within a free trade zone): getting rid of exchange rates fluctuations/risks, cuting transactions costs, encouraging competition and trade, etc...

"But apparently the unified currency distributed sovereignty solution causes bigger problems than the problem it is intended to resolve."
Come on, you have to compare like with like: the huge post-2008 recession and financial turmoil has revealed major flaws in the european union process, ok, but who knows how a non-unified Euro zone would have done.
And before the global recession, the euro was certainly beneficial.

Gravityloss said...

Here goes another oversimplification:

One problem with for example Greece is that some, say, French and German banks lent them money at high interest rate, knowing that EU would rescue them and the banks would make money in that.

If Finland then oppose that rescuing, it was seen as a Greece hater and suffering from overnationalistic racist far right political problems etc etc...

It's high pretension. The countries with big banks with lots of money to get from Greece are acting as "Greece's friends" and asking "Why do the Finns hate the Greeks?" The media is totally clueless when reporting this.

When talking with friends who have friends in financial circles, Greece's default has just been delayed and delayed but it will happen. The political system that is the EU doesn't seem to be able to do any swift and rational decisions here. (Of course, that's a good thing sometimes.)


Another thing is that Euro had these criteria for countries (budget undercut etc). Even before it was realized that the books were cooked, some countries didn't meet them. But kicking them out of the Euro would have been too much. So the whole system was unrealistic. I think at some point almost all countries violated at least some rule by taking so much debt.

There have been joking alternative unions being proposed here. Resurrection of the Swedish centered Calamari union with the crown as currency. Hansa union. Lutheran union with Berlin as headquarters. (Too bad southern Germany and Austria are catholic!) Martin Luther could be in the 100 mark bill. Would protestants be in it? I'm a bit weak on these flavours of christianity. Anything with Norway in it is popular since they have the oil, gas and hydropower.

Magnus Westerstrand said...

This could be handled by strong politicians.... however it seams like large parts of the eurozone did not have that. Now the currency could adjust the problems more or less if it was a small one now it is up to the politicians.

It is not as there ever where a huge difference though. Sweden and Norway e.g. more or less have to follow the Euro. But with very little might in negotiations about it...

Andrew said...

As Eli and other have mentioned there are real practical advantages to having a common currency across Europe, even for individuals and business in countries like the UK which opted to stay outside*, so I don't see any justification for calling it a "crummy lousy stupid idea".

I don't think that political union is neccessary to make it work, but it is neccessary for the member countries to abide by a certain set of rules and therefore surrender a certain amount of independence in economic policy. This is why there are supposedly strict entry criteria in place, unfortunately they were fudged to an extent for certain countries when the Euro was established and Greece's entry was verging on fraudulent. I guess it's a valid question whether political realities mean that such things were bound to happen.

*Although the UK is technically "outside" the Eurozone all major banks are connected to the Euro clearing systems, offer Euro accounts to private and business customers and have to comply with EU regulations regarding the pricing of transfers. Some high street shops in big cities will accept cash payments in Euros.

Peter T said...

The core problem is that German, French, British and US banks lent more to to Greece et al than could possibly be repaid. In some cases (such as Goldman Sachs) knowingly so, taking bets on default and so hoping to profit both ways. How would different currencies cure this? Sure, the Greeks could inflate, but their debt would be denominated in marks/dollars/francs/pounds, so they end up in the same mess. With the finance industry also able to move currencies around and move the mess to their own advantage - as happened in the 70s, 80s and 90s with the pound and the yen.

Debt is cured by writing it off (as with Argentina and countless others). This makes banks panic. Economists pretend that all money directly represents real wealth, so they panic too. But it's just numbers in a computer - changing the denomination does not make the issue go away.

By the way, medieval people understood this. They mostly used moneys of account (florins, livres tournois), which diod not relate to everday transactions. So when the king went broke, his bankers went broke. The peasnats hardly noticed.

Steve Easterbrook said...

"By the way, medieval people understood this. They mostly used moneys of account (florins, livres tournois), which diod not relate to everday transactions. So when the king went broke, his bankers went broke. The peasnats hardly noticed."

Surely, that's Jane Jacobs's real point. Local transactions can be based on what ever works as a local currency, without every having to connect up to what governments and bankers are doing. There are actually plenty of examples of true local currencies, usually specific to a particular town or city. Such things have nothing to do with either the Euro, nor the currencies it replaced.

On a different note, I note that MT didn't extend his list of preferences to: Frankfurt over Berlin, Manchester over London, Glasgow over Edinburgh, Toulouse (?) over Paris. I don't think the second city thesis bears up under scrutiny.

Michael Tobis said...

My understanding of the UK is limited. But I think Berlin is the second city in this regard; the money being made elsewhere.

Martin Vermeer said...

Off-topic, but title applies too well to pass -- I did telljaso:

I realize that Willard is only an ally insofar as process is concerned; that in substance he is stubbornly neutral. This alone is a matter of frustration.

Shining Raven said...

Europe is certainly not an optimal currency area, and indeed there are quite a few problems with the Euro which were obvious from the inception.

A few commenters already hinted at this (inflation rate not uniform, Mediterranean countries cannot devalue, banks lending to deficit countries), but I think the main point has not yet been addressed:

For over a decade, Germany, as the largest and absolutely dominant economy, has embarked on an aggressively competitive policy of suppressing wages way below the increase in productivity and the increase in wages in all other European countries. This has lead to huge imbalances, which now appear as a lack of competitiveness and a crushing debt burden in the "PIIGS".

The "stability pact" for the Euro has been laughingly one-sided, in the sense that it only addressed problems in a diverging inflation rate due to excessive public debt. What has been completely neglected is the scenario that actually happened, namely, divergence in inflation rates due to too low inflation in one of the major countries. And Germany is even proud of beating the other countries!

The mechanism is explained nicely by Heiner Flassbeck at the UNCTAD (United Nations Organization for Trade and Development) e.g. here :

http://www.intereconomics.eu/presse/index.php?presse=61

The paper can be downloaded here:

http://www.google.de/url?sa=t&source=web&cd=1&ved=0CBwQFjAA&url=
http%3A%2F%2F
www.intereconomics.eu%2Fdownloads%2Fgetfile.php
%3Fid%3D782&ei=FPqOTtqlOojR4QSCg-HDAQ&usg=AFQjCNHIOVgxst-E6a2kttyn6DF6XxJ79w

The offshot of all this is that Germany would probably be hit hardest in a break-up of the Euro, since the exchange rate of any new currency including Germany would shoot up and negate the competitive export advantage of Germany from a decade of wage depression. Unfortunately most Germans do not get that this would by all calculations be more expensive than bailing out the PIIGS and rescuing the existing Euro.

So the principal problem seems to me that the politicians in Europe do not actually understand what kind of problems can arise from inflation rates that are too low, and what is really required for convergence.

This is of course in addition to Europe intrinsically not being an optimal currency area. But if people do not understand what the necessary economic convergence requires, then it certainly cannot work, and the proposed solutions will be inadequate.