The euro — a Reaganomics wet dream

8 May, 2016 at 12:41 | Posted in Economics | 2 Comments

There are obviously still a lot of economists out there who do not accept the conventional wisdom that the euro is a bad idea.

However, there seems to be some rather basic facts about optimal currency areas that all economists would perhaps be wise to consider …

The idea that the euro has “failed” is dangerously naive. The euro is doing exactly what its progenitor – and the wealthy 1%-ers who adopted it – predicted and planned for it to do.

That progenitor is former University of Chicago economist Robert Mundell. The architect of “supply-side economics” is now a professor at Columbia University, but I knew him through his connection to my Chicago professor, Milton Friedman, back before Mundell’s research on currencies and exchange rates had produced the blueprint for European monetary union and a common European currency.

Mundell, then, was more concerned with his bathroom arrangements. Professor Mundell, who has both a Nobel Prize and an ancient villa in Tuscany, told me, incensed:

“They won’t even let me have a toilet. They’ve got rules that tell me I can’t have a toilet in this room! Can you imagine?”

As it happens, I can’t. But I don’t have an Italian villa, so I can’t imagine the frustrations of bylaws governing commode placement.

But Mundell, a can-do Canadian-American, intended to do something about it: come up with a weapon that would blow away government rules and labor regulations. (He really hated the union plumbers who charged a bundle to move his throne.)

“It’s very hard to fire workers in Europe,” he complained. His answer: the euro.

The euro would really do its work when crises hit, Mundell explained. Removing a government’s control over currency would prevent nasty little elected officials from using Keynesian monetary and fiscal juice to pull a nation out of recession.

“It puts monetary policy out of the reach of politicians,” he said. “[And] without fiscal policy, the only way nations can keep jobs is by the competitive reduction of rules on business.”

He cited labor laws, environmental regulations and, of course, taxes. All would be flushed away by the euro. Democracy would not be allowed to interfere with the marketplace – or the plumbing.

As another Nobelist, Paul Krugman, notes, the creation of the eurozone violated the basic economic rule known as “optimum currency area”. This was a rule devised by Bob Mundell.

reaganomicsThat doesn’t bother Mundell. For him, the euro wasn’t about turning Europe into a powerful, unified economic unit. It was about Reagan and Thatcher.

“Ronald Reagan would not have been elected president without Mundell’s influence,” once wrote Jude Wanniski in the Wall Street Journal. The supply-side economics pioneered by Mundell became the theoretical template for Reaganomics – or as George Bush the Elder called it, “voodoo economics”: the magical belief in free-market nostrums that also inspired the policies of Mrs Thatcher.

Mundell explained to me that, in fact, the euro is of a piece with Reaganomics:

“Monetary discipline forces fiscal discipline on the politicians as well.”

And when crises arise, economically disarmed nations have little to do but wipe away government regulations wholesale, privatize state industries en masse, slash taxes and send the European welfare state down the drain.

Greg Palast/The Guardian

2 Comments »

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  1. I sometimes get the impression Krugman is trying to position himself for a position in the Clinton Administration. (That could explain some of the things he has said against Sanders – and playing down things like Clinton’s associations with Wall Street and Goldman Sachs in particular.)

    Perhaps Mundell is for Trump, he’s got the hairstyle to match.

    On the Euro, there were very good reasons why countries joined, which related to trade financing, and cannot be explained by Optimal Currency Area theory. People who understand trade financing and why for example many emerging countries in East Asia pegged their exchange rates to the dollar, would understand the arguments. Freidrich List would as well.

  2. Proposition:

    The Euro system is weird because the “sovereign currency issuer” (the ECB/EU) has no fiscal branch.

    In MMT terms, the Euro nations are just currency _users_, not currency _issuers_. Therefore they have to actually finance their spending by means of taxes and borrowing. The Euro nations are thus much akin to the individual states in the US.

    In the US however, there is a currency issuer that _has_ a fiscal branch (the US government). This entity can increase _net financial assets_ held by the “economy” (the non-currency-issuing sector). It does so by running “budget deficits” (equivalent to _surpluses_ for the “economy”).

    In the Euro system, there is no such fiscal branch. The system is thus designed so that the (Euro denominated) net financial assets of the “economy” will not incresase.

    And an economy with non-growing net financial assets will not be able to grow long term. There can be short term growth relying on increased private leverage, but with accompanying subsequent financial instability and retractions.

    In sum, the Minsky/Lerner perpective held by MMT suggests that the Euro system is doomed to fail.


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