Update No. 63 – 08/06/12

I mentioned recently, I would expand on my views as to why the Euro as a currency has failed, and to some ideas on how it might be improved.  I offer my ideas because in my view, there is nothing worse than someone who decries a situation and yet proposes no improvements – Benjamin Franklin said “Any fool can criticize, condemn and complain and most fools do.

I have touched on vaguely on these concepts before, and I’m sure more prominent Economic commentators have given more impressive analysis, but for my regular readers, I will put in layman’s terms the issues and some ideas about how some could be dealt with.

Almost all people I’ve discussed the Euro with look at the monetary union in Europe and rightly recognise the reason the union is struggling, the focus of the integration was on a monetary union, with a complete lack of focus on fiscal and other regulatory reforms that could have more properly integrated an area that is to share a common currency.  There is a very good reason why these other reforms were ignored; the likelihood of finding agreement in these areas (particularly taxation) is somewhere close to zero.  There was early widespread support for example in legislating a maximum debt to GDP ratio, but due to relatively good economic times at the time the original framework was created, even this simple safeguard was not enacted.

To see how a monetary union could work, we could look around at the one monetary zone with the most similar geographical and economic size and conditions to the Eurozone.  That is of course the United States.  Economic output is approximately equal between the EU and the US, they cover quite similar land areas, but the US has successfully shared the US$ for the longest time, whilst the EU€ barely lasted 10 years before major disaster struck.  Like the Eurozone, there are areas of the US economy that are very weak; one might compare Michigan (a state of the US) to the problems of Greece (a ‘state’ of the Euro zone).  Clearly there are many differences, but reports of Michigan cities switching off streetlights to help reduce budgets strike a note very similar to the austerity conditions the weakest Euro zone members find themselves forced to engage in.

China and Australia also share very large economic zones with very disparate areas of strength and weakness and yet each shares a common currency across their respective countries with minimal monetary problems of substance (the AU$ has been stronger than is comfortable & many think the Renminbi is undervalued, but these issues are not on the scale of the EU€ problems).  These two monetary zones deal with their economic imbalances through equalisation processes.  Australia’s primary means of economic equalisation is delivered through the Goods and Services Tax (GST).  This allows the economically weaker states to obtain a disproportionately large portion of the GST revenue raised to spend on infrastructure and maintain a relatively level standard of living countrywide.  The Chinese ‘equalisation’ is much simpler; the authoritarian government simply makes decisions about where to allocate additional resources.

But why are these countries’ currencies not facing the pressures the Euro faces? The Australian/Chinese redistribution helps, but it must be noted there is much less of this sort of government directed re-allocation in the US, the states have much more control over the revenues they raise and how they’re used (though as Krugman points out succinctly, this sort of equalisation does occur in less direct means at a Federal level in the US, he directly contrasts this with Spain). The ability to print your own currency is obviously very important, but the ECB can do this if they really want, though due to the obvious conflicting political views within member countries on the wisdom of this, it is trickier than a single sovereign entity, the conflicting fiscal behaviour further complicates this, but again, there are significant US state taxation disparities, so it is achievable I’d think given the right motivation.  These matters all contribute, but to my view, the single greatest step the Eurozone could undertake that would create a very rapid and flexible economic stabiliser is an open immigration policy.  It is the one advantage these countries (China/Australia/USA) possess that the Euro doesn’t.  If I am a US citizen living in Las Vegas and things are going poorly economically in that city, I can move to Des Moines virtually on a whim if I believe the employment/economic prospects are better there.  In Australia, if I live in Hobart and want to move to Perth, I can probably make that happen in a matter of days if I am motivated, in fact there is presently a substantial shift into Western Australia and Queensland due to the strength of the mining industry in those states.  As to China, moving is probably not quite so simple, however, the rapid rate of urbanisation indicates a motivated citizen can make a move happen if they so desire.

The ability for these countries citizens to flow freely to the most economically suitable living situation is a special advantage.  The homogeneous languages within these 3 countries borders are a competitive advantage when coupled with intra-zone economic migration. Even if Eurozone countries wanted to open the borders within the Euro zone every bit as freely as within the countries mentioned, the language barriers would make it more complex to do so.  However, even with the language barriers, if Euro leaders were determined to maintain the common currency, and maintain very different fiscal policies, the best way would be an open border policy within the Eurozone.  In this way, skills being underemployed in one economy would naturally drift to the areas with the greatest economic need.  I appreciate there are people who are predisposed to dislike the idea of immigration as a matter of course, but if I lived in the Eurozone, I’d prefer an idea that drives the economic prosperity of my region than the continual financial shenanigans that try to give the appearance of a solution.

Thinking people will pick apart some obvious flaws in this concept.  The primary flaw (and I only point this out so you know that I know) and there is more than one flaw by the way, is that with separate taxation systems, the migration would lead to an increase in taxes raised in those countries that are already performing best and would strip out the revenue base of the weakest countries.  This would likely require some element of ‘redistributive’ policy, but remember, the person who leaves your country for the improved economic prospects of another within the Eurozone is no longer drawing an unemployment cheque in their economically weak home country (or if they were employed have created a job opening), so the effect is also naturally mitigated to some extent, furthermore, through increased productivity across the economic zone, the total tax base is increased.

Margaret Thatcher it must be said foresaw the flaws in the Euro with an accuracy that is frightening when viewed in hindsight – 08/06/2012



April 1st 2011

Jan 1st 2012

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Since Inception

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