I guess I saw this coming when they first pulled the common currency together. I had just read Jane Jacobs' "Cities and the Wealth of Nations".
Jacobs argued that currency should be local; that each currency supports one city at the expense of others, that a currency was a feedback mechanism supporting a tightly linked regional economy. When the city falls behind, its currency declines, facilitating exports and reducing imports, stimulating local contributions to the world. When the city gets ahead, its currency grows, facilitating imports and increasing the city's role in the world's cultural exchanges. Almost as if it were planned that way.
The trouble is that if more than one economic zone shares a currency, that the feedback mechanism fails completely until one city clearly dominates. At that point the feedback mechanism starts to work for the dominant city, increasing its dominance.
Jacobs, by the way, was a resident of Toronto, which I have, ever since reading the book, thought of as "Canada City".
How does the US get around this? Mobility, I think. People move around, tolerate moving around, sacrifice deep connections for personal financial gain. It's all effectively one city with rapidly shifting neighborhoods. There is very little that is local about America. When California becomes ungovernable, technology and entertainment move to Boston and Austin and Fhloston. The people follow the jobs. America is tightly economically coupled, so the currency serves well enough.
So when the Euro plans started, I was thinking "but, but, but Jane Jacobs". I saw not a peep about this anywhere in the press. Both inside and outside Europe everybody thought it was a great idea, so that Europe could "compete" with America. But Europe cannot compete with America, because Europe has cultural roots worth preserving, and language and culture differences that prevent mobility even if people are willing to sacrifice their roots. In other words, Europe can never function as a single labor market. Which means that once you unify the currency, you will tend to promote a single, large, tightly coupled sub-economy and squash the others. Which is pretty much what Washington Post business columnist Steven Pearlstein is describing. He claims you can't understand Greece's failures without reference to Germany.
So the Rhine valley emerges as Euro city. It was probably the leading candidate in any case. And Jacobs turns out to be right in the end. Which spooks me, because I was right and practically everybody writing about business or economics was wrong. (In this case I can't prove it. I don't think I ever posted anything about this.)
Everybody but me thought the Euro idea was the bee's knees. Maybe I should have said something, but I didn't even have the audience I now have (Don't get me wrong, I love you guys! I just want more!) so what good would it have done?
As far as I know Jacobs herself never said anything about the Euro, which surprises me.
Update: Great. I'm on the same side of this one as climategatist Christopher Booker. I'd best reconsider.
21 comments:
And I predicted eventual financial chaos as we have now when my father first started to explain economics at the dinner table. But I was not an economist, and did not have any equations to prove it. I eventually studied ecological economics and found out I was in good company. But that isn't really considered economics either. I found more insight in the field of geography (and anthropology) - so did Paul Krugman. And since he is an economist, he actually got a nobel prize for some of those insights. But not for predicting financial chaos.
Krugman writes frequently on this subject.
"Doomed" currencies don't die, though. And it's already taken the dollar out of its privileged position, putting the US more on the same economic footing the other nations are.
As long as everything's otherwise sound, as is the situation for the Scandinavian countries minus market fundamentalist failure Iceland, then the border-crossing currency is a minor temptation.
There's no country in Europe that's done half as much sloughing and decoupling as the US has. QED the attraction of a border-spanning index currency is not going away.
Europe's economy is also far sounder than the US's. The Chinese new yuan/renminbi shows no signs of challenging either the Euro or the dollar.
I think what Germany did will make the economic picture in Europe much better. Japan used to ban predatory lending, hostile takeovers, currency speculation, and a host of American-derived crimes given the sanction of law and forced on other nations by bullying. That led to their first post-war economic crisis. And their second.
You're currently living in the most fraud-ridden and bubble-prone modern economy on Earth, fundamentally.
Right in your stomping grounds of Texas, James Galbraith gives you the positive "bee's knees" side of having a benchmark currency as it applies specifically to what Greece did, and what the US did - it's part of his "The Predator State" book.
This "failed" currency is still about 30% higher against the dollar than it was eight years ago ... if it reaches parity again, as some are predicting, it will still be higher vs. the dollar than it was when I spent a month working in Amsterdam in 2002.
In other words, the Euro has strengthened greatly in the last decade and has only given up a portion of that strength.
Now, one can argue that the EU has been too aggressive in letting weaker economies in the Euro Zone. And some countries might leave. But I don't think you'll see Germany, France, and other western European countries go back to their own currencies.
And there's more mobility in modern Europe than I think you imagine. And less in places like the working class portions of places like Somerville and Medford (since you mention Boston) than you imagine, as well.
The Euro experiment seems less shaky if you see it as "a bundle of fictions that has some ability to scare away bureaucrats from certain transactions". The more you look, the more you see "there is no there there". Everything is underspecified, and there is a codified notion of translating laws in different ways in different languages to prevent alarming the voters of different countries (I wish I could remember the bureaucrat-speak for the conceit).
But as long as red tape and bureaucrats and rent-seekers are shooed away from certain transactions, the fiction of a common market is made real enough for a real economic benefit to be gained.
Greece will eventually leave the Euro currency, but not the common market. It will have its own currency (for the purpose of devaluing it, to boost exports), in less than three years time, I bet. Fifteen years later after switching, it will rejoin the Euro currency.
How much has Britain not using the Euro currency harmed it, or the European common market? Probably, not a whit.
The European common market generates less value than the United States common market, for exactly the reasons you gave. But it does generate some real value.
I think I prefer a simple carbon tax rate, which is unitless and should therefore cross borders easily regardless of how currencies fluctuate. It seems to me that carbon credit trading schemes may be more sensitive, and that could have some negative consequences if local currencies are used. Disclaimer: the opinion expressed above opinion is not necessarily that of my employer, or anybody I know, or even me.
Europe is full of young people in different countries than they were born in. There is a considerable amount of international movement.
My prediction: the euro survives, thanks more to politics than economics. What's over is eurozone expansion. No-one wants to replace their national currency with euros any more. But the euro will be preserved.
"Europe is full of young people in different countries than they were born in. There is a considerable amount of international movement."
Yes, exactly, except I'd argue with the "young people" though maybe that's because I don't want to be called an "old people" :)
Plenty of French working in Madrid, and my experience is late-30s to 40s.
Yeah, that's young compared to my 56, I guess. How do they stand me? :)
Oh, during the Sarko election in France, I stood in line in Madrid for 2.5 hours with a friend wanting to vote (against him), and we arrived early, we thought. Those behind probably waited 4, 5 hours to vote. A line greater than a mile long, for sure.
"My prediction: the euro survives, thanks more to politics than economics.
"
I disagree, there. The heart of Europe is very healthy, and the dropping of border restrictions and a common currency can't hurt.
" What's over is eurozone expansion."
Yes, what I said above, though my thinking is opposite of yours because ...
"No-one wants to replace their national currency with euros any more.
"
Germany and France won't want to support those that want to. Pick your poison ...
The inclusion of weak economies was always a risk for the Euro zone. There's now an imbalance, and the stronger countries outside like Scandanavia and the UK aren't likely to be tempted to join.
Yet.
Give it time. The North American Union, after all, took a civil war to stick together and only had a century or so of history to overcome ...
Oh, and why doesn't this software accept "blockquote", and why would anyone use a blog tool that doesn't?
"The trouble is that if more than one economic zone shares a currency, that the feedback mechanism fails completely until one city clearly dominates."
That was always my objection to European financial union too.
But the current fad is that bigger is always better...
Spain was always full of old Brits and Nordic types. They infest the coast. Bug or feature. You decide.
MT --- Taken up economics now, have you?
David, I've always been interested in economics. It's hard to avoid in trying to pull together the big big picture.
Mike,
If you are interested in economics you should read "The Wealth of Nations" by Adam Smith and watch Michael Moore's "Capitalism: A love affair".
Smith wrote about how the city workers, who only knew for instance how to make the head of a pin, were better paid than rural workers who had far more skills. He wrote how in a market with many players the prices were optimised. And he wrote how when you get a group of entrepreneurs (you know those people for whom, as GWB pointed out, the French have failed to come up with their own name) together they are soon plotting how to exploit the general public.
The problem is with the name "Free Market". People think it means no regulation, but no regulation only allows the entrepreneurs to combine into a monopoly to maximise their exploitation of the public. (Microsoft etc.) For Adam Smith a free Market was one where there were many players so that the price charged to the public was the lowest common denominator.
Michael Mann shows how the American banks have combined into a monopoly that controls Congress.
HTH,
Alastair.
MT --- Suggest you ask James Galbraith what you ought to read then. He seems fairly sensible to me and he is rather conviently located for you.
There is a fairly new school of economic thought called development economics; an article about this appears in the 2010 May 17 issue of The NewYorker. I suspect you will approve of the attempt to use the scientific method.
How does the US get around this? I would say it doesn't, but suffers from the centalised US dollar just as Jane Jacobs suggests. America has many stagnating city & town economies, and a large unemployment problem (just because the unemployment rate is lower than Europe is no excuse - any unemployment is bad & a waste of resources). You shouldn't be content to say the 'currency serves well enough', but look at how much better it could be if the city economies of America (& Europe & everywhere else) had their own local currencies.
Just as Jane said, centralised currency causes stagnation in cities and towns (i.e. future cities). If the European politicians who pushed their countries into the Euro had read & understood Jane Jacobs, they would never have created the Euro, but done just the opposite and set their cities free with their own city currencies. I'm also surprised Jane didn't write about the Euro.
What about the most progressive of the "New Europe"? Estonia, Slovakia, Czech Republic, Slovenia? Hungary? Even Poland?
A lot of industry has moved there (although some of it has already moved on to China) and they have perhaps been more fiscally responsible than the Greeks?
Buses, trams and cars are already made mostly there.
It's a varied bunch of countries, but most of them are willing to join the Euro. Wouldn't it be nicer to have them than some of the less responsible countries from "Old Europe"?
For Michael Tobis: A large common currency has real value for small countries whose money value can change quickly and is subject to attacks and speculations. People having for example foreign debt can see it multiply overnight if a country decides to devaluation or if a floating currency is used as a device by a multibillionaire.
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