Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Thursday, June 09, 2005

The Euro "Was a Really Dumb Idea..."

When central bank monetary policy isn't consistent with fiscal plans of a particular region, politicians in that region can get pretty upset. That is what is happening in Europe regarding the Euro. [links and quotes below are courtesy of A Canadian Econoview].

The Dutch, the Germans and the Italians have all complained in the past few days that the ECB's management of monetary policy has been damaging to their economics, and there have been mutterings, in some countries more overt than in others, about leaving the Euro and reverting to their own national currencies.
I have long been curious about how long the Euro could survive without having some oversight body with both the authority and the power to require and force member nations to pursue fiscal policies consistent with the ECB policy; the recent negative votes by France and Holland on the EU constitution meant this oversight body was not going to come into existence any time soon.

Tyler Cowen has more on the Euro at Marginal Revolution.

People had a good idea what the Euro would be worth but the road back would involve much more uncertainty. I don't even know if a resurrected deutschmark would be a stronger currency than the Euro (I can, however, give you my guess on the lira). And wouldn't either everyone in Europe, or no one, wish to cash in to the new currency right away, depending on the conversion rate and the associated degree of credibility? Don't currency substitution models, and all their tricky implications (it becomes very difficult to control prices), come into play? Might short-term interest rates go whacky? What would be the domino effect on, say, Polish asset values?

I've never been a huge fan of the Euro, but these are scary questions. It would be ironic if the strongest argument against the Euro was simply the eventual need to dissolve it.

It would be even more ironic if the strongest argument in favour of keeping the Euro is that there is no politically feasible way to get rid of it. And if that is the case, then look for some form of EU constitution to pass, eventually.
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