The Euro

[DTMark]

Forgive my ignorance here. Thinking about the EUR and economists and other vocal parties who have always said that countries sharing the same currency is a bad idea, doomed to fail, etc...

Why?

Well, the usual argument against sharing the currency is that it prevents a country from being able to devalue. True enough.

Bear with me.

I ring up loan companies and ask to borrow £10,000. However I don't want to repay in sterling. I want to repay in DTMark tokens. I declare that one token is worth £1. So, it doesn't make any difference.

Once I have taken the loan out, I can then value a DTMark token at 10 pence to £1. So I now only need to pay back £1,000 of the £10,000 and I've fulfilled my obligation and paid back the loan. Hurrah.

Now clearly, that's one of a number of reasons why nobody would lend to me on that basis: because, ultimately, I decide how much I want to pay back.

And this is the main reason advanced for keeping your own currency - you can shaft your creditors at will and decide how much you'll pay back.

However it's not as simple as that, because in devaluing your currency in a globalised environment with world trade you also steal wealth from all your own people, too who now have to pay more for everything they need especially in a net importer of basics like the UK is.

So I'm thinking that all Governments ought to be stopped from doing that, which means having the same currency. Or, that repayments on bonds should be inflation linked so if the borrowing economy has rampant inflation leading to devaluation then their debt just goes on and on and on.

And it ought to be very much cheaper for the UK, if in the EUR, to borrow EUR and repay them because the cheat loophole has been closed and the value of the repayments will be worth the same to the creditor.

It would also mean that the people of a nation can't be shafted as well since Governments like to run up debts and inflate them away.

Everyone should behave and it should work perfectly well. On the subject of "behave" I can hear people say "Ah. But Spain, Portugal, Ireland etc. did not behave and they knew what they were up to"

In the case of the current "crisis" - it's not as if nobody saw this coming. All Western governments might feign surprise, but would have known as far back as 2004 that the boom was going to end in tears - if the average lay-person can work it out easily enough and see where it's going I can't accept that politicians are actually that stupid.

They are however inclined, thanks to short terms in office, and the desire for re-election, to simply keep pumping the bubble up, and so are going to try and cheat every time. And it's not just the foreigners who get robbed.

So it would be good for the people if we could not devalue, because it would - or certainly, should - perhaps it rests on this - stop Governments spending money they don't have.

All the bond holders who lent to Greece, Portugal, Ireland and so on are up in arms. But then they agreed to buy the bonds with a certain risk premium (the yield/interest rate offered) and so could have declined to buy if they had bothred to open their eyes to the deficits running which were going to end in tears. Again, these people aren't that stupid.

So they can demand higher risk premiums in their lending if the countries are spending too much, or exit that market. They did not demand sufficiently high premiums, it seems. More fool them. The UK's deficit was and is big enough. Yet people still lend to us, and we're not going to pay them back their premium.

But the fear is of default. Inflating away the currency here seems not to matter a jot to the buyers of bonds who, unless blind, can see full well what the UK is doing to shaft them, yet they buy. Inflating a debt away is only default by another name albeit a "milder form".

Now leaving aside the debates about NWO and the single world currency, which is slightly separate: isn't it better for everyone that we all trade in the same currency?

[james_chch]

<snip>Well, the usual argument against sharing the currency is that it prevents a country from being able to devalue.</snip>

I'm with you on this one. I've read through a fair bit of Ambrose's babblings in the Telegraph and I still can't see why having a common currency has any inherent flaws. As you point out, to some extent it protects the economy from the politicians. There are a couple of other points I'd like to add to yours:

Currency devaluation is a form of default. It should be called 'Liars Default', as it's used by people who aren't able to meet their obligations but want to keep telling everyone that they did in fact meet them. It also only works if you are the only ones doing it. If the economic problems are widespread, then everyone can't all devalue at the same time.

Another option which the politicians no longer have in a common currency is the ability to keep interest rates artificially low. This has allowed UK politicians (technically the allegedly independent BOE) to prop up house prices. This means that the free market's mechanism for fixing the problem is prevented from operating. In Ireland the debts have been forced out into the open.

And another option which politicians would lose is QE. This is effectively monetising debt, and IMHO this should be a criminal offence, not a policy tool.

[mattyfc]

Countries with similar economies (inflation and growth) can happily share a currency with greater stability and growth. If the euro only contained Germany, Holland, Benelux and France (possibly) it would work great.

The problem is the different levels of inflation / growth between the economies in the eurozone and the role currencies play in balancing out this problem. Germany has gained competitiveness over the rest of the zone, there is no way of the rest of the zone adjusting via a devaluation, the only way is through deflation. With such massive debt levels this is impossible.

Paying off the debt accumulated in southern Europe, Ireland and growing / creating jobs will not be possible in the current euro structure. They need to devalue against Germany and the rest of the world to begin to grow again. Only once the zone is restructured will recovery begin. The real problem is growth rather than the debt.

( http://www.marketwatch.com/story/the-coming-euro-split-2010-11-21 )

[DTMark]

Countries with similar economies (inflation and growth) can happily share a currency with greater stability and growth. If the euro only contained Germany, Holland, Benelux and France (possibly) it would work great.

The problem is the different levels of inflation / growth between the economies in the eurozone and the role currencies play in balancing out this problem. Germany has gained competitiveness over the rest of the zone, there is no way of the rest of the zone adjusting via a devaluation, the only way is through deflation. With such massive debt levels this is impossible.

Paying off the debt accumulated in southern Europe, Ireland and growing / creating jobs will not be possible in the current euro structure. They need to devalue against Germany and the rest of the world to begin to grow again. Only once the zone is restructured will recovery begin. The real problem is growth rather than the debt.

( http://www.marketwat...plit-2010-11-21 )

While it probably seems weird for anyone to advocate the EUR as a good idea while the Eurozone is falling apart, my post was more one of devil's advocate since I don't pretend to understand enough to be able to comprehend it. So I'm not arguing with you, but again throwing thoughts together:

As far as "similar inflation" is concerned, I'd want to see a definition of "inflation". I once believed that inflation was the rate of increase in the price of what we buy, later I thought it was the rate of increase in the money supply. Now the latter might cause the former, but the former isn't necessarily linked to the latter and it's possible to have huge consumer price inflation at the same time as deflation in the money supply - since that's what the UK has now and I imagine is going to gather pace.

I'd have thought that having a single currency unifies inflation.

If you had one country which is stuck in the middle of nowhere miles away and hasn't sought to provide for itself, importing rather a lot of the basics, and the cost of fuel goes up, then prices will go up there since it costs more to import everything. Is that country experiencing more inflation than other countries?

Well, I'd have thought no, all it means is they have less money to spend on other stuff and need to rebalance towards production. In a unified currency that country can't simply increase its money supply like the UK can e.g. by printing money to pay for stuff.

I'm trying to distil something quite complicated into a few lines, since clearly, inflation is not simply "rising cost of imports". Another cause of inflation might be wage inflation. In the example above, can that country seriously see wage inflation?

As far as growth goes, if growth is the increase in GDP, then that far off country isn't going to see a lot of growth while it has to pay a fortune for everything it needs unless it discovers a resource it didn't know it had, like oil. However to me, that simply means that they have less money. I don't see why that means that the money cannot be denominated in the same currency as other places. They just have less of it.

For instance, poor people in this country don't have the ability to trade their labour and buy goods in some offshoot of GBP which means they can devalue it so they can have the same stuff as everyone else.

Are these mad, random ramblings

[james_chch]

Paying off the debt accumulated in southern Europe, Ireland and growing / creating jobs will not be possible in the current euro structure. They need to devalue against Germany and the rest of the world to begin to grow again.

Paying off those debts isn't possible and wouldn't be under any structure. They have to default on the debts. Growth can't begin till the malinvestments are purged from the system: property bubbles have to burst and countries living beyond their means have to rapidly adjust to living within them. Once they've defaulted, they won't be able to borrow and will be compelled to live within their means.

I just don't see the Euro structure as being the problem. If anything it seems to be forcing the problems into the open. As far as I can see, the problems are all to do with reckless lenders and reckless borrowers, and the currency involved is surely not the issue?

[Toto deVeer]

While it probably seems weird for anyone to advocate the EUR as a good idea while the Eurozone is falling apart, my post was more one of devil's advocate since I don't pretend to understand enough to be able to comprehend it. So I'm not arguing with you, but again throwing thoughts together:

As far as "similar inflation" is concerned, I'd want to see a definition of "inflation". I once believed that inflation was the rate of increase in the price of what we buy, later I thought it was the rate of increase in the money supply. Now the latter might cause the former, but the former isn't necessarily linked to the latter and it's possible to have huge consumer price inflation at the same time as deflation in the money supply - since that's what the UK has now and I imagine is going to gather pace.

I'd have thought that having a single currency unifies inflation.

If you had one country which is stuck in the middle of nowhere miles away and hasn't sought to provide for itself, importing rather a lot of the basics, and the cost of fuel goes up, then prices will go up there since it costs more to import everything. Is that country experiencing more inflation than other countries?

Well, I'd have thought no, all it means is they have less money to spend on other stuff and need to rebalance towards production. In a unified currency that country can't simply increase its money supply like the UK can e.g. by printing money to pay for stuff.

I'm trying to distil something quite complicated into a few lines, since clearly, inflation is not simply "rising cost of imports". Another cause of inflation might be wage inflation. In the example above, can that country seriously see wage inflation?

As far as growth goes, if growth is the increase in GDP, then that far off country isn't going to see a lot of growth while it has to pay a fortune for everything it needs unless it discovers a resource it didn't know it had, like oil. However to me, that simply means that they have less money. I don't see why that means that the money cannot be denominated in the same currency as other places. They just have less of it.

For instance, poor people in this country don't have the ability to trade their labour and buy goods in some offshoot of GBP which means they can devalue it so they can have the same stuff as everyone else.

Are these mad, random ramblings

My guess is that if you had a single world currency then world growth and development of all sorts would slam to a halt.

[Van]

Yes, it's a terrible idea.

The Eurozone is not one big economy - it is a collection of economies, each with their own different factors of production and macroeconomic characteristics. Growth may overheating in one country because of (eg) mass immigration, while need stimulating in another country because of other factors. Therefore is is plainly STUPID to have all these different economies controlled by one interest rate and one central bank policy that doesn't allow each economy to adjust to others. It is simply about not allowing a free market to operate and therefore the misallocation of economic resources.

Stupid idea, and it is doomed to failure.

[james_chch]

My guess is that if you had a single world currency then world growth and development of all sorts would slam to a halt.

I don't follow that one at all. I think you may be taking the eurosceptics' line of argument to its logical conclusion. Unless of course you're making an ironic comment and I'm being a bit dense...

[DTMark]

Yes, it's a terrible idea.

The Eurozone is not one big economy - it is a collection of economies, each with their own different factors of production and macroeconomic characteristics. Growth may overheating in one country because of (eg) mass immigration, while need stimulating in another country because of other factors. Therefore is is plainly STUPID to have all these different economies controlled by one interest rate and one central bank policy that doesn't allow each economy to adjust to others. It is simply about not allowing a free market to operate and therefore the misallocation of economic resources.

Stupid idea, and it is doomed to failure.

Following this line of reasoning - some of the states in the US have ben hit more badly than others.

Yet I don't see (maybe this happens, but we just don't hear about it) those states arguing that the USD was a silly idea in the first place for all the same reasons while basket cases like California and Florida are going down the pan, was never going to work, and making moves to introduce their own currencies.

[LiveAndLetBuy]

I'm with you on this one. I've read through a fair bit of Ambrose's babblings in the Telegraph and I still can't see why having a common currency has any inherent flaws. As you point out, to some extent it protects the economy from the politicians. There are a couple of other points I'd like to add to yours:

Currency devaluation is a form of default. It should be called 'Liars Default', as it's used by people who aren't able to meet their obligations but want to keep telling everyone that they did in fact meet them. It also only works if you are the only ones doing it. If the economic problems are widespread, then everyone can't all devalue at the same time.

Many people I know in Spain liked the euro because they were sick of their politicians inflating their way out of debt problems. They'd rather have the ECB controlling the money suopply than their own politicians. The problem is that it's a double edged sword - currency controls also act as a shock absorber when financial crisis hit.

Another option which the politicians no longer have in a common currency is the ability to keep interest rates artificially low. This has allowed UK politicians (technically the allegedly independent BOE) to prop up house prices. This means that the free market's mechanism for fixing the problem is prevented from operating. In Ireland the debts have been forced out into the open.

If Britain had joined the euro in 2002, interest rates would have been much lower, and the bubble even bigger. I don't have the data at hand, but IIRC during the boom years eurozone interest rates were half those of the BoE, mainly to help Germany deal with a recession. This is the point that IMHO destroys any argument for the euro. Quite simply the UK economy would have been completely and utterly phucked by the euro, had she joined in 2002.

And another option which politicians would lose is QE. This is effectively monetising debt, and IMHO this should be a criminal offence, not a policy tool.

It's just another way of creating inflation. They've always done it, by hook or by crook.

[Toto deVeer]

I don't follow that one at all. I think you may be taking the eurosceptics' line of argument to its logical conclusion. Unless of course you're making an ironic comment and I'm being a bit dense...

Well, I don't think that the diversity of economic conditions around the word could be accommodated by a single currency, and the homogeneous monetary policy that would follow.

Also my view is that world development is driven by the trade potentials that exist around the world. That is why trade barriers and tariffs are so dangerous. Under a single currency and single monetary policy these potentials would be diminished, if not erased. There would be no economic incentive for development.

I think of it this way; current does not flow in a circuit without potential. Same is true in world trade, in my view.

[Van]

I don't follow that one at all. I think you may be taking the eurosceptics' line of argument to its logical conclusion. Unless of course you're making an ironic comment and I'm being a bit dense...

It's a logical argument. If you extend the monetary union to the whole world, then China & the US would be governed by a single central bank. How on earth would that work? It would fall apart within a year.

The more countries that come under a single currency, the more inefficient and unworkable it becomes. That is why the EUR it is failing under its own increasingly bloated weight.

[DTMark]

Growth may overheating in one country because of (eg) mass immigration

What is "overheating", though? One of the reasons so many Poles came to work here was because the value of their labour was high here compared with Poland, and were able to send the cash home. On the one hand, I'm not sure I understand "overheating" and on the other, a single currency would minimise this.

while need stimulating in another country because of other factors.

I was alluding to this in my first post. Any country can stimulate growth through production, innovation and trade. For example, tax reductions to encourage certain investment and behaviours. Those seem legitimate to me. If "stimulating growth" means "printing money" which can be done thanks to an independent currency, I don't see that being a good idea nor does it stimulate any real growth at all.

[james_chch]

The Eurozone is not one big economy - it is a collection of economies, each with their own different factors of production and macroeconomic characteristics. Growth may overheating in one country because of (eg) mass immigration, while need stimulating in another country because of other factors. Therefore is is plainly STUPID to have all these different economies controlled by one interest rate and one central bank policy that doesn't allow each economy to adjust to others. It is simply about not allowing a free market to operate and therefore the misallocation of economic resources.

Everything you've said applies identically to say different regions within the US or even the UK. Why is the single currency doomed to failure, but the US dollar isn't? I think the source of much of this is eurosceptics in the UK who object to closer political ties and the integration that a single currency would represent. I have no problem with that, but why don't they just say that, rather than suggest it's a technical issue.

I'm open to persuasion here, there's so much criticism of the way the Euro zone is structured then I wouldn't be surprised if they were right and I just hadn't undersood the problem. But then virtually everyone still believes house prices only ever go up.

[Traktion]

After watching Greece and Ireland unfold over recent years, I would have thought the answers would have presented themselves.

[Toto deVeer]

Everything you've said applies identically to say different regions within the US or even the UK. Why is the single currency doomed to failure, but the US dollar isn't? I think the source of much of this is eurosceptics in the UK who object to closer political ties and the integration that a single currency would represent. I have no problem with that, but why don't they just say that, rather than suggest it's a technical issue.

I'm open to persuasion here, there's so much criticism of the way the Euro zone is structured then I wouldn't be surprised if they were right and I just hadn't undersood the problem. But then virtually everyone still believes house prices only ever go up.

I think that you should exclude the US from the argument. It is an anomaly within world history. It was an empty continent with essentially no economy or culture at all. Even so it took a civil war to clear the tensions associated with economic integration.

The US was a bottom up system, the rest of the world, including the Eurozone are top down imposed systems. There is a big distinction. I think that history teaches that top down systems are not enduring, aka Soviet Union, British Empire, etc.

Edited November 23, 2010 by Toto deVeer

[SomethingHasToGive]

Everything you've said applies identically to say different regions within the US or even the UK. Why is the single currency doomed to failure, but the US dollar isn't? I think the source of much of this is eurosceptics in the UK who object to closer political ties and the integration that a single currency would represent. I have no problem with that, but why don't they just say that, rather than suggest it's a technical issue.

I'm open to persuasion here, there's so much criticism of the way the Euro zone is structured then I wouldn't be surprised if they were right and I just hadn't undersood the problem. But then virtually everyone still believes house prices only ever go up.

I think the US works because most of the individual states did not have mature economies, also they have economic expectations and structures that work within a single currency. For example some US states have state banks that just print money to pay for large infrastructure investments, this allows creation of money without debt. Within Europe this is illegal under the Maastrict treaty. US states have a much more similar alignment in social policy too. European politicians are used to having total control of this, Greece being an example of a completely different society to Ireland or the UK.

However I don't really understand the subtleties either so this is a good thread.

[DTMark]

After watching Greece and Ireland unfold over recent years, I would have thought the answers would have presented themselves.

Well, no. Hence my asking

Ireland's problems aren't dissimilar to the UK's - greater order of magnitude perhaps. Our turn will come. To flip it around:

How can the UK be in such a similar mess (austerity drive, banks with inadequate capital, bank runs, unemployment et al) when it isn't in the EUR?

We could have curbed bank lending. So could they. Neither did. That doesn't seem to have anything to do with the single currency per se.

Portugal and Greece ran up deficits thanks to among other things overspending on welfare relative to GDP. So have we.

As was mentioned above, all the EUR seems to have done is to force the issues out into the open whereas here we still sit on the lid of the can of worms and try to prevent anyone opening it.

[james_chch]

It's a logical argument. If you extend the monetary union to the whole world, then China & the US would be governed by a single central bank. How on earth would that work? It would fall apart within a year.

I don't understand enuugh about how central banking currently works to be able to answer that properly. But isn't the problem with the US/ China system that it is inherently unsustainable? America borrows ever increasing amounts from China so they can consume Chinese goods, which gives China the cash to buy more US Treasuries? That can't go on indefinitely can it?

Also, since China has pegged its currency to the dollar, aren't they in practise in a single currency already? With a money printing Fed as the single central bank?

[DTMark]

I don't understand enuugh about how central banking currently works to be able to answer that properly. But isn't the problem with the US/ China system that it is inherently unsustainable? America borrows ever increasing amounts from China so they can consume Chinese goods, which gives China the cash to buy more US Treasuries? That can't go on indefinitely can it?

Also, since China has pegged its currency to the dollar, aren't they in practise in a single currency already? With a money printing Fed as the single central bank?

I have a suspicion that the inherent issues have more to do with the concept of central banking itself than anything else.

I have yet to hear anyone advance a good reason for the existence of central banks, which seem to exist (certainly here, anyway) to pretend to sit at arms' length from the Government colluding in their efforts to rip off international creditors while simultaneously streaming the value of the population's productive labour to a small group of people and doing nothing of any value.

The "crunch time" for the US and China might be fast approaching and your final point seems very valid to me.

[Toto deVeer]

I don't understand enuugh about how central banking currently works to be able to answer that properly. But isn't the problem with the US/ China system that it is inherently unsustainable? America borrows ever increasing amounts from China so they can consume Chinese goods, which gives China the cash to buy more US Treasuries? That can't go on indefinitely can it?

Also, since China has pegged its currency to the dollar, aren't they in practise in a single currency already? With a money printing Fed as the single central bank?

China has elected to maintain the peg in order to develop an export driven economy. It was China's choice, not imposed on them.

You must look at it this way, Japan would not have developed without exporting to the US; China would not have developed without exporting to the US. This was this potential in trade that was exploited in order for them to develop. This potential was created by choice and by currency manipulation. Without this there is no incentive for China to develop because the ratio of labour to energy cost does not justify it.

[james_chch]

I think that you should exclude the US from the argument. It is an anomaly within world history. It was an empty continent with essentially no economy or culture at all. Even so it took a civil war to clear the tensions associated with economic integration.

The US was a bottom up system, the rest of the world, including the Eurozone are top down imposed systems. There is a big distinction. I think that history teaches that top down systems are not enduring, aka Soviet Union, British Empire, etc.

Good points. But aren't the limitations you are getting at with the top down systems political ones, not economic ones? And aren't your examples of the Soviet Union* and British Empire just illustrations of the fact that all empires eventually crumble?

[ralphmalph]

Well, no. Hence my asking

Ireland's problems aren't dissimilar to the UK's - greater order of magnitude perhaps. Our turn will come. To flip it around:

How can the UK be in such a similar mess (austerity drive, banks with inadequate capital, bank runs, unemployment et al) when it isn't in the EUR?

We could have curbed bank lending. So could they. Neither did. That doesn't seem to have anything to do with the single currency per se.

Portugal and Greece ran up deficits thanks to among other things overspending on welfare relative to GDP. So have we.

As was mentioned above, all the EUR seems to have done is to force the issues out into the open whereas here we still sit on the lid of the can of worms and try to prevent anyone opening it.

Irelands and Greece's problems are vastly different from our's. The problem in Ireland and Greece is basically a corrupt political system. In Ireland their PM has personally held up a by election for 17 months because it could cost the majority. Here in the UK the timing of a by election is nothing to do with the PM and set in law. In Greece their is so much corruption that they can not collect taxes because of bribes. Then there is the lying and the coverups of the issues. The Irish banks a few months ago all passed a very stringent stress test that said that they are all solvent bar one. In rude good health. Well 2 months later that was exposed as a pack of lies. Contrast this to the UK somebody in the Govt worked out our banks were bust and then took action to sort the problem (whether we agree with the action is immaterial for this argument). They are now some of the best capitalised banks in the world. i.e it got fixed.

What the above argument boils down to is Trust. The world Trusts the UK to sort it's problems out in an honest way. They do not trust Ireland, Spain, Greece to do the same, certainly Ireland and Greece have zero credibility at this present time hence the reason for a group of Germans and IMF bods running their economies for the next three years at least, Spain has a chance to come honest especially on the "How much have your banks lost on Property?" "Zero you say?" - We do not believe you, question.

[Toto deVeer]

Good points. But aren't the limitations you are getting at with the top down systems political ones, not economic ones? And aren't your examples of the Soviet Union* and British Empire just illustrations of the fact that all empires eventually crumble?

Some have argued that the US is a world empire. It is, in some respects, but it is an empire of different currencies, based upon domination of trade, whereas the Soviet Union, and Europe (which is also a form of Empire, perhaps under the original Roman model), are/were single currency empires. These never last.

The only way that the Eurozone and Euro will survive in its current form is if the southern European peoples are prepared to submit themselves to economic and political subjugation and destruction of whatever little wealth that remains. I just don't think that people are so inclined. The only issue really is what the alternatives will be.

Edited November 23, 2010 by Toto deVeer

[DTMark]

China has elected to maintain the peg in order to develop an export driven economy. It was China's choice, not imposed on them.

Sounds like a plan to me, having an export led economy, just like having a financial services led economy over here. However the phrase "all the eggs in one basket" seems appropriate when "driven" could be replaced with "almost exclusively dominated". Isn't that more political short-termism and lack of economic planning than currency related per se?

You must look at it this way, Japan would not have developed without exporting to the US; China would not have developed without exporting to the US. This was this potential in trade that was exploited in order for them to develop. This potential was created by choice and by currency manipulation.

I can agree with this. However was China simply naiive to believe that their US bonds would be a reasonable store of value and shouldn't be surprised or complain too loudly as the US trashes the dollar and it's all OK because they made some money for a while - or, so they thought

Without this there is no incentive for China to develop because the ratio of labour to energy cost does not justify it.

Not sure I follow that one - that without the ability to manipulate currency there would be no incentive to trade, sounds like a used car dealer voluntarily shutting down after being fined for winding the mileometer back on their cars because without the ability to do that it isn't worth being in business.