Milton Friedman wrote this about the Euro to a friend of his who was a professor in Italt
Here is a link to an article the professor wrote on Friedman and the Euro (PDF) http://www.cato.org/pubs/journal/cj28n2/cj28n2-10.pdf
My own memories of conservative thought at the time is that conservatives were against it because it represented loss of national sovereignity and the empowering of Brussels.
I suppose Krugman was talking about professional economists. I don’t remember what they said. But as a liberal nonprofessional noneconomist, I do remember that I was thrilled by the Euro, because it meant that I didn’t have to change money a zillion times when I travelled in Europe anymore.
They’ve got the “printing presses”, so to speak. Their problem is a legal one. Their mandate is price stability only, and not anything else that would be helpful right now. Thus the caretakers of the currency refuse to save the currency. They don’t want to transgress past their legal mission.
It’s true that they can’t buy sufficient quantities of other kinds of debt, but it seems you’re saying the interest rate is preventing them from buying debt. Maybe I’m misreading you, but that’s not true. Interest rates aren’t preventing anything. Interest rates are high because of their legal inability to make sufficiently large purchases.
Monetary “easing” means making conditions easier with money. It’s quantitative now because it’s not being done with a change in the target of interbank rates, as is usual, but instead with a new specified quantity of base money put into the system.
The way currencies are backed by a commodity is through a peg.
By backing a currency with gold, you don’t allow the gold price to float. The gold price is fixed at a specific amount, and the monetary authority enforces that peg by being willing, always, to buy or sell gold at that fixed price. If every country is on a gold standard, then all exchange rates are also fixed by a constant ratio. This is similar to how the euro works. A German euro is fixed in value in an exact ratio to an Greek euro, the ratio in this case being exactly 1 to 1. Thus the eurozone countries have fixed exchanged rates, like in the old gold standard days, and once again it’s causing problems.
Honest question; as straightforward as this sounds, why does it not irreperably damage large federal countries, like the USA, Canada, or Australia? Those countries are in effect giant “Dollar zones” where individual “nations” like Texas, British Columbia, or Queensland would in theory Greekify themselves and damage their neighbours. Why isn’t the Eurozone working the way the USA does, monetarily speaking?
Rick Jay, the difference is that while different monetary policies would be beneficial for the US the benefits of a combined currency probably outweigh the drawbacks. Depressed industrial areas like the Rust Belt probably could have benefited from a devalued dollar but the workers from there could move to areas of the country that were being helped by a strong dollar. They could do this without learning a new language, and the cultural mores were similar enough for them to adapt easily. The ease of migration mitigated against the bad effects of a one size fits all monetary policy.
The Euro did not cause the problem in Europe, but it enabled it and excludes the traditional way out of such problem.
The first part of this is that you actually have seen these sorts of problems in the United States in miniature form. Look, for instance, at the staggering population decline of Detroit. If the Nation of Michigan had its own Michi-dollar, we would’ve seen a smaller decrease in population. Labor markets would have been able to clear more easily with a devaluation of the local currency compared to the federal dollar. puddleglum points this out about the rust belt generally.
There are no local devaluations in the US, so we see people flee the city, a 25% decrease over the last two census reports. They went to safer places where there were jobs, sometimes just the suburbs but often much further. Labor mobility helps labor markets to clear. In fact, some people cite the indirect effect of anchored labor as a potentially significant cause of the US’s current labor problems. People can’t sell their houses, so they can’t move, so they can’t find new work.
In Europe, the problem is language and culture. Move to a new place, with new laws, new food, new language, new weather, and leave everything you know behind? More labor mobility would help solve the problem, but that’s not going to happen so easily.
The next factor that can ease the pain in depressed regions of the US and Canada is balance of payments. Fiscal policy balances out what monetary policy can’t do.
Kansas has farmland. They also have… more farmland. They’re not in a position to easily pay for their own transportation infrastructure, for the medical bills of their elderly, for retirement pensions, etc. So the kind people of New York, Texas, and California pay not only for their own road miles and old folks, they also pay for a significant chunk of Kansas’s burden. We’re all one country, after all. There’s no tribalistic mentality getting in the way. Again, this is not a thing that is doable in Europe. The Germans aren’t willing to pay for Greek roads, government buildings, public pensions, and so on. Hard to blame them for that.
As far as financial markets go, another couple important factors are state debts and the central bank. US states don’t issue sovereign, “risk-free” debt. That means the solvency of US banks isn’t directly dependent on the ability of states to pay their debts. A federal default would be catastrophe, but California’s budget problems aren’t putting unbearable pressure on the California banking system. Plus, the Fed is willing to do its job to shore up the system. The Fed will happily help North Dakota banks, while the ECB has made clear it has no intention to help Greek banks.
And there you basically have it. The dollarzone works because people can easily move to change jobs and because we all tax and spend together, with a genuine lender of last resort helping out, too. The eurozone doesn’t work because it has none of those things.
It’s a very good question. The US is a natural common currency area because of a) heightened labor mobility between, say, California vs. New York relative to Spain v. Germany and b) greater fiscal integration in the US vs. Europe. The latter could be rectified, but recognize that Europe would need more counter-geographical fiscal stabilization than the US because of their corresponding labor mobility shortfall.
This link compares California government bankruptcy vs. Greek, and deepens the analysis:
http://rodrik.typepad.com/dani_rodriks_weblog/2011/11/why-is-the-bankruptcy-of-the-greek-government-different-from-the-bankruptcy-of-california.html