But when it comes to the crunch, one American region will help out another, even if grudgingly. The US is unquestionably a single unified political entity (yes, I know, red states, blue states, the “heartland” etc. - all countries have such divisions). Not sure that the same is true of the eurozone.
It’s confusing enough for those of us who live there. 
Basically, eligibility for membership of the European Union (essentially the free-trade-and-movement successor to the EEC and the EC) is political - democracy, free press, no death penalty etc - while the criteria for joining the Euro currency are economic. It’s the latter that some of the members have fudged.
There’s a lot more complexity in there describing various country groupings - EFTA, the Schengen countries, Council of Europe and probably loads more - but the EU/eurozone one is the most important differentiation from an outside point of view. Basically not all members of the EU are in the eurozone, the UK being the largest one.
Not really. Companies and banks - who worry about transaction costs in a big way, could price things in Euros, and use Euros to move money around as needed. Ordinary consumers could buy things in their currency at the given exchange rate (particularly easy with debit/credit) or euros.
It would be weird, yes, but not ineffective I think. The system woudl tend to be self-balancing.
Although, of course, the UK meets the economic criteria to go on the Euro, if they so chose.
This in a nutshell. Frugal Germans have no problem with the Greek lifestyle, but are not willing to pay for it.
How so? Yes, it would be devastating for the economies of Portugal, Ireland & Greece (Spain is worth saving IMO) but it would vastly improve the other countries. And if it’s as you said, a fanciful idealization that didn’t work out to expectations, then perhaps it’s best to correct that wrong decision NOW, before things get even worse?
I haven’t heard of any specific state dragging the whole U.S.A. down; things are rather shitty across the board over here.
(Wouldn’t mind seeing Delaware go, however…I hate Delaware.)
David McWilliams, one of Ireland’s leading economists, has called for Ireland to leave the Euro. Morgan Kelly also seems to be leaning in that direction. It’s true that not many are echoing this, but given that these were among the few economists to warn during the boom years that a horrific bust was on the horizon, I’d imagine at least some are quietly thinking it.
That’s more a reflection on the utter incompetence of the Irish government than on confidence in Eurozone membership. It’s hard to blame them, since the people running this country are absolutely hopeless and clueless. But the anger at them is not only about the damage they’ve done to the economy but also about the loss of sovereignty it will involve. I work in a TD’s office and there have been absolutely tons of emails flooding in over the past couple weeks from people asking what the hell was the point of Ireland fighting for its freedom from Britain only to surrender it to the EU and IMF.
And yeah, when they see those restructuring demands and more importantly when they see the consequences of them - the huge unemployment, the massive pay cuts, the loss in public services and costs of those that have been sold into private hands, which always result when the IMF steps in - it’ll be a bit of a nasty wake-up call.
I think there’s a sense, though, that that’s less and less true if Germany is going to have to be bailing out the other countries. I think the Euro will collapse eventually - but it will be at the point when Germany no longer considers itself to be benefiting from it, because of the problems caused by the marginal countries.
I’m not really seeing that TBH. Ireland itself seems to be getting most of the blame (and as a poster above mentions, the low corporation tax rate is a big part of that, although I disagree that it’s the whole story).
Ireland did not have to bail out these banks. It certainly didn’t have to bail out their bondholders, which is where the real problem lies. Its decision to do so can be blamed on its corrupt and inefficient government. Also, while the bank bailout is certainly the primary reason for the desperate state we’re in now, years and years of McCreevy fiscal policies also played an important role in creating an economy that could not withstand the global financial crisis.
You’re just moving the conversion costs around, and either way it’s the customers who pay them in the end. A company operating in the Spanish market couldn’t just buy things from Germany without taking into consideration the value of the peseta vs. the Deutschmark, because ultimately it must sell things priced in pesetas.
You can’t use two currencies in one country that float against each other*, so everything must at some point be converted into the standard local currency.
- somebody’s going to say “hey, they use the euro and the <whatever> in <some border/tourist region>”. Yeah, but that’s small potatoes, not country-wide, and somebody, likely the customer, swallows an exchange fee somewhere in the transaction.
No it does not. The criteria stipulate that a maximum overall deficit must not exceed 60% of GDP and the annual deficit not 3%. The UK is nearing a 13% annual deficit and 65% overall deficit. It is not expected to meet the annual deficit criteria before 2015, but probably not the gross deficit criteria. But as it is, few – if any - members of the Euro zone meets the Euro-zone’s economic criteria. Estonia, however does, and will join the Euro in January 2011. Sweden, Norway and Denmark also do – but won’t join.
I think it would be impossible for Norway to join the euro
Why? They’d have to join the EU first. They’ve had nation polls on that question in the past. And there has been talk of having a new one. Though with the current EU problems, I wouldn’t bet on it being anytime soon. There has also been talk of Switzerland joining the EU and the Euro-zone. When pigs fly. The rather unfortunate thing is that many of the European countries outside the Euro-zone are doing much better than the countries in the Euro-zone. Iceland also wants the Euro.
What’s the difference between annual and overall deficit? Are you perhaps confusing deficit with debt?
Yes that is right. 3% deficit, 60% of GDP debt. And some other criteria. Perhaps they should also consider a maximum on foreign trade deficit. Germany bitches Greece for its gross negligence in fulfilling the criteria. But Germany should itself take some of the blame for watering down the seriousness of the criteria, as it itself violated them even before the financial crisis – but refused to take blame for it.
Sorry, I was just nitpicking because I thought you were including Norway among EU countries that meet the criteria to join the euro.
How much of the eurozone’s problem is movement of labour?
Within a single country with a common language (US, UK, DK etc) you can have one region doing well and another poorly, but people can easily move from the poorly performing areas to the well performing areas.
Even though there is free movement (in principle) within the EU (and eurozone) it seems that it would be a much bigger problem to up sticks from Spain and move to Germany - certainly without a lot of planning. So you can end up with huge numbers of unemployed people stuck in a poor region who are costing the state money and unable to contribute much back, which surely makes recovery even harder?
My response to the OP would be that the euro will probably survive. The politicians will fudge something, somehow, and keep things more or less on track. It will probably be rather unpleasant for the weaker economies, though.
That is another aspect of why the eurozone makes a less than ideal currency zone. There is more mobility of labour now - famously from Eastern Europe to the west, but there are also more French, German, Spanish people, mainly young people, working here than before. Not surprising when unemployment in Spain is 20%.
However, I don’t think it compares to the sort of labour mobility you see in the U.S., where people seem to move to the other side of the country more readily.
Ok, can someone explain to me (not an economist, mathematically literate) in small words why the fact that Greece/Ireland/etc are in financial trouble means that there’s a problem for the Euro? What exactly is it about a unified currency that suddenly makes all this a problem for strong economies like, say, Germany, in a way that wouldn’t apply if they all had their own currencies?
Fairly simple. If the PIIGS had their own currency, they would normally devalue (or in other terms engage in monetary stimulus à la the Federal Reserve) to regain competitiveness relative to labour costs and generate economic growth. As part of Eurozone they have no control over interest rates or money supply, so this is right out. Were they able to do this, the better off PIIGS (Spain, Ireland, maybe Portugal) would likely be able to rebound economic growth. I have my doubts about Greece, their problems run far, far deeper than Spain or Ireland, both of which besides a massive property bubble, are generally well-run places where EU money was generally well-spent (infrastructure, etc).
Further, or course, their debt is Euro denominated, and pre-Euro they were likely to have debt denominated mostly in their home currency, and devaluation would have shifted some of the costs of alleviating that debt to the bond holders.
It all comes down to the fact that in the Euro zone they don’t have control over their own monetary policy, and Euro Zone has to have a one size fits all policy that ends up mostly fitting Germany (not that I blame the Germans…).
I agree with wm and would add that there is the fear that in order to avoid a default by any of the PIIGS, the ECB will buy the debt of those nations. Nothing wrong with that except that the money they use to make the purchases will be conjured out of thin air - what is often referred to as ‘printing euros’.
I don’t think that has actually happened yet since in both cases (Greece and now Ireland), the other members of the common currency group have said they will support some sort of bailout. This also affects the value of the Euro but not nearly as profoundly as monetizing the debt of member nations would.
The U.S. also has a much more homogenous population. We share a common language (well, mostly) and the economic disparity between regions isn’t as vast as, say, Greece & Luxembourg. Most importantly, all Americans consider themselves “Americans”, first and foremost, no matter which state they live in or which baseball team they support.
Can’t say that about the EU, which is basically a (failed?) experiment to reverse 3,500 years of near-constant bloodshed.
P.S.: Norway is weird.