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At some point, it occurred to me that switching everyone over to the same currency should have been the last thing that Europe does to unify its economy, rather

by lmkg 15y ago

At some point, it occurred to me that switching everyone over to the same currency should have been the last thing that Europe does to unify its economy, rather than one of the first things. It was a big symbolic victory, but as a practical matter it means the countries in the Eurozone share a fiscal policy, while still having independent economies. They should have waited until their economies were already on the same page before conjoining their currencies, but instead they tried to force a unity that wasn't there yet. Now Greece is missing one of the big knobs that could have been turned (by itself or others) to deal with its crisis, namely devaluing its currency. This article points out something I hadn't seen before, which is one way in which the unified currency may still end up somehow achieving its goal of unifying Europe: as the strong, fiscally-responsible states bail out the weaker ones, they get to dictate policies in those states as conditions of the bailouts. Politically, the bailed-out states will start aligning more with European interests compared to purely self-interested ones. It's not the best way to achieve European unity, but it has some advantages. On the one hand, it's a little unfair that Germany gets to strong-arm Greece into doing what it wants, because it's an involuntary loss of sovereignty. On the other hand, it seems like a decent heuristic that the states with the strongest economies get more power to make economic decisions. How well that works out for Greece in the long run depends on the politics and alignment between what's good for Germany, what's good for Greece, and what's good for Europe as a whole. I assume the EU will be making sure German bankers don't simply pillage Greece's economy for decades.

powertower 15y ago
> ...as the strong, fiscally-responsible states bail out the weaker ones, they get to dictate policies in those states as conditions of the bailouts. Politically, the bailed-out states will start aligning more with European interests compared to purely self-interested ones. History has shown us that wealth is transferred, not created. And sometimes it's multiplied (when we switched from gold to debt / fractional reserves), but again, never created. Due to this, the stronger players tend to import the benefit from and export the pain into the weaker players, as that is the only play there is to make. And then the cycle repeats itself where the rich players get richer and the poor players get poorer until some major event happens (global war, industrial revolution, energy discovery) and things get shuffled a bit).
- protomyth 15y ago
  > History has shown us that wealth is transferred, not created I'm not sure that part is true. I do believe there is more wealth today worldwide then say in 1700.
  - powertower 15y ago
    Where did it come from? What is it backed with? If you can't answer that, then it is a result of multiplication rather than creation. Wealth is a relative term and has remained about the same through time... There are those that are "rich", there are those that are "somewhat comfortable", and there are those that are "poor"... The amount each group has is irrelevant. Wealth is about the purchasing power of relative standards of living (between the different groups).
    - adamjernst 15y ago
      Wikipedia: Wealth is the abundance of valuable resources or material possessions There are ~750 million automobiles in the world today. In 1700, there were none. Thus there is more wealth in the world today (on that one dimension; others similarly). The amount each group has is irrelevant. Umm.
      - deleted 15y ago
        [deleted]
    - drusenko 15y ago
      This is false. Wealth ultimately boils down to the most finite resource we all have -- our time -- and we are able to accomplish a whole lot more with our time today than we were in the past. Let me explain: Imagine the edge case at the very beginning of civilization. There are two families, and for illustrative purposes they both spend 100% of their time farming without tools, and live in caves. One day, someone invents the hoe. Let's imagine that this saves both families 50% of their farming time. Now they are each able to build a home, instead of living in a cave. The families use a currency to trade crops, and there is a total of $100 in the world, $50 for each family's output. One of two things happened here, but they're pretty much the same thing: - If we hold the money supply as fixed (saying wealth is zero-sum), then the price of the crops would go down, since we can now buy houses with our money too. - If we hold the price of the crops fixed, then there is now more money/wealth that exists in the world. It doesn't really make sense for the price of crops to go down -- they're the same thing that existed yesterday. It makes much more sense to say that there is more money in the world. Regardless, wealth was created. It's a lot more complicated in our currently economy because there are a lot more moving parts, but the fundamentals still apply. Take something that used to take a lot of time and make it take less time and you'll have created wealth. People can now use the extra time they have to go be productive elsewhere in a way that benefits people. Going back to your comparison about rich/comfortable/poor, you're not arguing that wealth is zero-sum, you're arguing that there has always been wealth inequality. But the presence of wealth inequality doesn't imply that wealth is zero-sum: wouldn't you say that even today's poor Americans are wealthier than the richest Sumerians?
llambda 15y ago
> They should have waited until their economies were already on the same page before conjoining their currencies, but instead they tried to force a unity that wasn't there yet. Exactly. By having a single currency weaker economies were propped up at the expense of stronger economies, (yep, this is Germany, esp now); in essence, promoting economic mediocrity. Had the respective economies been similar in strength in regard to each other it would have been more feasible. But now it's too late for that. The Euro happened. In the long run, the Euro failing could be a good thing. By this I mean that those economies more capable might fair better however those that aren't, not so much. If they can escape debt (a Grecian default for instance) and then focus on rebuilding a sustainable economy, that in the long run would be more healthful. For now it's been put off, left for tomorrow, so to speak.
- bd_at_rivenhill 15y ago
  I see it differently: there's nothing wrong with a common currency and separate fiscal policy as long as you don't try to maintain the fiction that all sovereign entities have equal credit risk. Excessive/unexpected devaluation is just de facto default, but making this tool unavailable shouldn't mean that you should ignore the risk of de jure default. The countries of the common economic block should be able to enjoy the benefit of reduced friction in trade without being in a situation where it looks like a good idea to loan money to the Greek government at low interest rates. Regulatory authorities should be insulated from the political fallout of telling banks that they need to treat Greek bonds as less creditworthy than German bonds when they go to calculate the required amount of capital to carry their assets.
  - llambda 15y ago
    Alternatively, nation-states could have retained their currency and focused on enacting policies that reduced friction of trade, i.e. a single currency is completely unnecessary to do this. There is no reason why a third-world economy should be joined with a first-world economy under a single currency: the outstanding result is that the currency hurts and ultimately the stronger economy props up the weaker a la Germany and Greece.
bd_at_rivenhill 15y ago
Switching to a common currency had enormous benefits in terms of reducing the friction associated with trade between nations in the Euro zone. It wasn't a bad idea to switch early but at least two glaring mistakes were made with the implementation: 1. The European establishment decreed that no sovereign in the region would ever default on its debts and backed that decree up by allowing banks to hold the debt without allocating capital against it. This was the European equivalent of US rating agencies rubber-stamping toxic mortgage securities with a AAA rating. 2. Member states have been allowed to cheat outrageously on the Masstricht treaty criteria, even before shenanigans like Greece window-dressing its numbers by disguising some debt as currency swaps, without much enforcement. If these errors hadn't been made, they probably wouldn't be in a situation in which member states were allowed to paper over their problems with cheap credit while digging the entire continent into a very dangerous hole.
- danmaz74 15y ago
  #1 it linked to #2. The theory was that with Maastricht criteria no member state should have even come close to default. But this doesn't work if you aren't able to effectively control the application of those criteria. By the way, I don't think that a fixed maximum deficit requirement, independent of the external conditions (eg the 2008 crisis...) is such a good idea. But at least during normal times it should have been applied.

by lmkg 15y ago

powertower 15y ago

> ...as the strong, fiscally-responsible states bail out the weaker ones, they get to dictate policies in those states as conditions of the bailouts. Politically, the bailed-out states will start aligning more with European interests compared to purely self-interested ones. History has shown us that wealth is transferred, not created. And sometimes it's multiplied (when we switched from gold to debt / fractional reserves), but again, never created. Due to this, the stronger players tend to import the benefit from and export the pain into the weaker players, as that is the only play there is to make. And then the cycle repeats itself where the rich players get richer and the poor players get poorer until some major event happens (global war, industrial revolution, energy discovery) and things get shuffled a bit).

protomyth 15y ago
> History has shown us that wealth is transferred, not created I'm not sure that part is true. I do believe there is more wealth today worldwide then say in 1700.
- powertower 15y ago
  Where did it come from? What is it backed with? If you can't answer that, then it is a result of multiplication rather than creation. Wealth is a relative term and has remained about the same through time... There are those that are "rich", there are those that are "somewhat comfortable", and there are those that are "poor"... The amount each group has is irrelevant. Wealth is about the purchasing power of relative standards of living (between the different groups).
  - adamjernst 15y ago
    Wikipedia: Wealth is the abundance of valuable resources or material possessions There are ~750 million automobiles in the world today. In 1700, there were none. Thus there is more wealth in the world today (on that one dimension; others similarly). The amount each group has is irrelevant. Umm.
    - deleted 15y ago
      [deleted]
  - drusenko 15y ago
    This is false. Wealth ultimately boils down to the most finite resource we all have -- our time -- and we are able to accomplish a whole lot more with our time today than we were in the past. Let me explain: Imagine the edge case at the very beginning of civilization. There are two families, and for illustrative purposes they both spend 100% of their time farming without tools, and live in caves. One day, someone invents the hoe. Let's imagine that this saves both families 50% of their farming time. Now they are each able to build a home, instead of living in a cave. The families use a currency to trade crops, and there is a total of $100 in the world, $50 for each family's output. One of two things happened here, but they're pretty much the same thing: - If we hold the money supply as fixed (saying wealth is zero-sum), then the price of the crops would go down, since we can now buy houses with our money too. - If we hold the price of the crops fixed, then there is now more money/wealth that exists in the world. It doesn't really make sense for the price of crops to go down -- they're the same thing that existed yesterday. It makes much more sense to say that there is more money in the world. Regardless, wealth was created. It's a lot more complicated in our currently economy because there are a lot more moving parts, but the fundamentals still apply. Take something that used to take a lot of time and make it take less time and you'll have created wealth. People can now use the extra time they have to go be productive elsewhere in a way that benefits people. Going back to your comparison about rich/comfortable/poor, you're not arguing that wealth is zero-sum, you're arguing that there has always been wealth inequality. But the presence of wealth inequality doesn't imply that wealth is zero-sum: wouldn't you say that even today's poor Americans are wealthier than the richest Sumerians?

llambda 15y ago

> They should have waited until their economies were already on the same page before conjoining their currencies, but instead they tried to force a unity that wasn't there yet. Exactly. By having a single currency weaker economies were propped up at the expense of stronger economies, (yep, this is Germany, esp now); in essence, promoting economic mediocrity. Had the respective economies been similar in strength in regard to each other it would have been more feasible. But now it's too late for that. The Euro happened. In the long run, the Euro failing could be a good thing. By this I mean that those economies more capable might fair better however those that aren't, not so much. If they can escape debt (a Grecian default for instance) and then focus on rebuilding a sustainable economy, that in the long run would be more healthful. For now it's been put off, left for tomorrow, so to speak.

bd_at_rivenhill 15y ago
I see it differently: there's nothing wrong with a common currency and separate fiscal policy as long as you don't try to maintain the fiction that all sovereign entities have equal credit risk. Excessive/unexpected devaluation is just de facto default, but making this tool unavailable shouldn't mean that you should ignore the risk of de jure default. The countries of the common economic block should be able to enjoy the benefit of reduced friction in trade without being in a situation where it looks like a good idea to loan money to the Greek government at low interest rates. Regulatory authorities should be insulated from the political fallout of telling banks that they need to treat Greek bonds as less creditworthy than German bonds when they go to calculate the required amount of capital to carry their assets.
- llambda 15y ago
  Alternatively, nation-states could have retained their currency and focused on enacting policies that reduced friction of trade, i.e. a single currency is completely unnecessary to do this. There is no reason why a third-world economy should be joined with a first-world economy under a single currency: the outstanding result is that the currency hurts and ultimately the stronger economy props up the weaker a la Germany and Greece.

bd_at_rivenhill 15y ago

Switching to a common currency had enormous benefits in terms of reducing the friction associated with trade between nations in the Euro zone. It wasn't a bad idea to switch early but at least two glaring mistakes were made with the implementation: 1. The European establishment decreed that no sovereign in the region would ever default on its debts and backed that decree up by allowing banks to hold the debt without allocating capital against it. This was the European equivalent of US rating agencies rubber-stamping toxic mortgage securities with a AAA rating. 2. Member states have been allowed to cheat outrageously on the Masstricht treaty criteria, even before shenanigans like Greece window-dressing its numbers by disguising some debt as currency swaps, without much enforcement. If these errors hadn't been made, they probably wouldn't be in a situation in which member states were allowed to paper over their problems with cheap credit while digging the entire continent into a very dangerous hole.

danmaz74 15y ago
#1 it linked to #2. The theory was that with Maastricht criteria no member state should have even come close to default. But this doesn't work if you aren't able to effectively control the application of those criteria. By the way, I don't think that a fixed maximum deficit requirement, independent of the external conditions (eg the 2008 crisis...) is such a good idea. But at least during normal times it should have been applied.