The EURO Experiment!

[abhijit]

Is it time to call it to an end?

[techgnome]

And do what?

-tg

[abhijit]

Go back to the currencies that existed prior to the Euro, like the Drachma, the Lira and whatever Portugal and Spain used before they participated in the Euro experiment.

[techgnome]

why?

-tg

[FunkyDexter]

Because being locked into the Euro means that the Eurozone countries cannot devalue their currency to compensate for a weak economy, making spiralling debt leading to default and ultimately bankruptcy their only option. The only way to avoid that will be for the strong Euro economies to bail them out but even that will fail if it makes their creditors nervous.

A single economy cannot work when it crosses national, and therefore governmental, boundaries. For the last 30 years there has been no motivation for any of the southern european (Italy, Greece, Spain, Portugal and, to a lesser extent, France) to spend responsibly becaue they knew the other Euro countries had to back them up or the whole project would fail. With the recent financial crises they can no longer sustain their debt and are turning to the likes of Germany to bail them out. Why Germany? Because Germany was the only Euro country that did behave responsibly through the last 2 decades. In fact, Merkel was largely derided but international economists for not pushing growth harder - but it was her conservative (note the small c) spending aproach that's left Germany strong now. Unsurprisingly, the Germans aren't keen on the idea of paying for the Greek Welfare state.

And this was always inevitable. When a single currency spans multiple nations it makes sense to spend like crazy because you gain the benefit as an individual nation but pay the price as part of a collective. If you're the only one not spending then you'll gain none of the benefit but you'll still be puttting the same money in as everyone else.

The ERM failed for a reason. It removed financial sovereignty from the member nations. The Euro simply took the same mistakes and magnified them.

[abhijit]

And this was always inevitable. When a single currency spans multiple nations it makes sense to spend like crazy because you gain the benefit as an individual nation but pay the price as part of a collective. If you're the only one not spending then you'll gain none of the benefit but you'll still be putting the same money in as everyone else.

Welfare mentality

[moti barski]

TO STRENGTHEN THE ECONOMY :

abolish taxes and bank intrests
increase amount of allowence(money, food) per citizen (with minimum bureaucracy)
abolish or deminish religions
encourage negation of overpopulation
limit workers per area (facility)
every 5 - 10 years print new money that out values the old
outlaw human resources companies

note : in case of war convert your money to a foreign country currency

[Nightwalker83]

Germany could legally invade the other Euro counties and pose their rule on them.

[FunkyDexter]

print new money that out values the old

This has been tried before. I'm not sure we really want to risk another Wiemar Repulic lest the Germans really do invade the other Euro countries... again.

And what does this:-

abolish or deminish religions

...have to do with the Euro?


And how, exactly, do you encourage the negation of overpopulation? I'd suggest planting a large thermo nuclear device somewhere under Portsouth would be a good place to start but that's mostly because I come from Southampton and have a predeliction for violence. I'm not sure it'd be possible to sell politically.

[moti barski]

you see dexter many rich people don't have knowledge or produce anything they just make money from having money : bank interest, loan sharks, loaning cars, lending houses, they have lots of money in the bank
by printing new money that out values the old they lose theire edge 1000000 becomes 10000 moneys
they are now forced to produce , learn, sell theire property...
pretty much the same goes for religions

its ok if you disagree, BUT be aware doing so would help paris hilton and the likes

[techgnome]

woah there... that affects more than jsut the rich people... it affects everyone. Your 100 just became 10... and that kind of thinking (jsut print more money) causes inflation... for every dollar (Euro, dracma, what ever) that you take away from the "rich" is an extra dollar your bread costs. It's not going to force people to sell anything... it's just going to make the poor poorer. It also takes away incentive for people to produce and make money. I'd love to be able to just live off of interest... heck, that's part of the American dream. So what if it means I no longer produce? Some one else will. I still need to buy products... pay rent, buy gas, pay taxes, buy groceries... heck someone has to build my next TV, I can't do it. Not every rich kid is like Paris Hilton, that's a bad example. The Trump kids are pretty down to earth. They get an allowance like most people (granted it's probably more than what I got, but they still needed to earn it). They have to earn their own way... they aren't going to automatically inherit when The Trump goes.

Religion on the other hand... is a different subject all together and is probably best left alone.

-tg

[FunkyDexter]

That shows a fundamental missunderstanding of economics.

The £5 in my pocket is worth £5 because it can buy me £5 worth of goods and services. If you issue "Fun Bucks" at an exchange rate of £5 to 1FB then the £5 in my pocket will still buy me £5 wirth of goods and services... or 1FB worth of goods and services. They're both the same thing. The value of money has nothing to with the size of the number on it but rather the value of what it can do for you.

You haven't changed the balance of wealth one iota. You've merely saved youself some ink (you won't need to print as many zeros) and cost yourself a massive administrative excersize.

The only exception would be if you're talking about just printing a bunch of new notes for the existing currency rather than releasing a new currency. This is what the Germans tried in the 30s. It didn't work. The reason it didn't work is because it still doesn't actually change the value of the totality of money in circulation. It merely devalues the individual notes. So now the value of the £5 in my pocket has less value than it did before you printed your notes... but so do the £5 notes is EVERYONE's pockets. We all lose. So where has the value gone? The government... because they printed, and are holding, the newly printed notes. It's really nothing but a form of tax.

[techgnome]

Actually, his point (I think) was to print extra money... so much so that it loses buying power... which is what causes inflation and prices to go up... so now your £5 doesn't go as far as it used to. It's what causes things like a $1USD to equal 15,000 Pesos.... which means that $0.50 candy bar costs 7,500 pesos... so much paper money was printed, it caused inflation, driving the price up goods and services up. And it gets worse when there's centralized bank to keep it in check. That's why the FED raises and lowers rates periodically. When inflation starts to happen, they raise rates, causing money to be taken out of circulation, this in turn causes a "demand" (albiet a somewhat fake one) by inducing a drop in supply. It's a balancing act...

-tg

[FunkyDexter]

Actually, his point (I think) was to print extra money

Editing my previous post crossed over with your post. Anyway, my last paragraph answers why that won't work either for pretty much the exact same reasons you've given.

[NeedSomeAnswers]

Because being locked into the Euro means that the Eurozone countries cannot devalue their currency to compensate for a weak economy, making spiralling debt leading to default and ultimately bankruptcy their only option. The only way to avoid that will be for the strong Euro economies to bail them out but even that will fail if it makes their creditors nervous.

A single economy cannot work when it crosses national, and therefore governmental, boundaries.

Whoa, i see your not a fan of the Euro then FD ! While it has its problems i just dont see that all the things you have listed can be credited to being the Euro's fault.

Basically many of the Countries in the Euro Zone over spent dramatically, and in the past you could do that and devalue your currency to get out of the problem and i agree that you can no longer do that.

Devaluing your currency however is pretty terrible for the citizens of that country as seen in Zimbabwe were a loaf of bread was costing about a zillion Zimbabwean dollars, it is really not a great thing to do it just means that things cost a lot more for your citizens to buy.

Surely after the latest debt crisis which had nothing to do with the Euro but with banks acting irresponsibly, Countries will see that they can no longer keep spending dramatically more than they have.

Greece is the worse example with them having a debt level of something like 120% of there GDP exacerbated by the banks but it was already far to high before then. Greece and many other countries have effectively borrowed to much money to avoid either putting up taxes or reducing services convincing people that they could have services for less then they actually costs by constantly deferring when they have to pay for them.

Surely this model of governance is what needs to change, the currency is just a side issue. Most countries have debt but once that debt goes over 50% of your GDP then some alarm bells should ring.

If i ruled the world we would only have 1 currency for everyone, i really dont see then need for all these different currencies apart from to make currency speculators rich or correction richer than they currently are.

a few other points -

A single economy cannot work when it crosses national, and therefore governmental, boundaries. For the last 30 years there has been no motivation for any of the southern european (Italy, Greece, Spain, Portugal and, to a lesser extent, France) to spend responsibly becaue they knew the other Euro countries had to back them up or the whole project would fail

France's economy is fine. Its in a much better state then the UK's and they have a much higher projected growth rate for the next year, higher then both the UK's and the USA's for instance.

Why Germany? Because Germany was the only Euro country that did behave responsibly through the last 2 decades.

Actually there are many other European countries who are doing very well in the Euro Zone e.g. Poland, The Cheque Republic & Sweden who's economy grew at a fairly massive 7.3% last year and still has the best growth figures in Europe this year, and France who are also doing fine.

Germany are not bailing out the Greeks on there own they are just the biggest contributors as they have the largest and richest economy.

The ERM failed for a reason.

Yep because it was a terrible idea but its not them same as the Euro and cant really be compared.

The Euro is not perfect and has its problems but getting rid of it now in the middle of a debt crisis would just make things a lot worse.

[abhijit]

NSA,
The over spending is what becomes difficult to control once you cross national borders. The countries doing well would have done so regardless of the presence of the Euro. The countries doing badly would also have done poorly in spite of the presence of the Euro, a fact illustrated by Greece.

So the point of my post is if countries like Germany / France decided to bet on Greece and Greece doesn't do well, at some point of time they should have the option to walk away from the table.

[NeedSomeAnswers]

So the point of my post is if countries like Germany / France decided to bet on Greece and Greece doesn't do well, at some point of time they should have the option to walk away from the table.

They do have this option, it would just cost them a lot of money. As with any gamble if you lose and then cut your losses you are out of pocket. Europe has done it on such as scale with Greece though that many European banks own Greek debt. If Greece defaults not only do the European countries lose the money from the bailout but they will have to deal with another potential banking crisis as a number of banks would probably fail as they would lose huge sums too.

If we ever manage to get out of this current situation the answer seems to me is to prevent it happening again by, Greece as a condition of European membership (and in fact any country in the European union) should not be allowed to over spend to the extent that they did. As a country you cant keep on borrowing to pay for things, once your debt passes 50% of GDP any country in the EU should be forced to cut back borrowing until they are under it again you therefore protect the other countries in the union.

You have to remember that the richer countries in Europe have had many benefits from being in Europe and the Euro too otherwise they would be still in both the EU and the Euro.

The countries doing well would have done so regardless of the presence of the Euro. The countries doing badly would also have done poorly in spite of the presence of the Euro, a fact illustrated by Greece.

It is a bit difficult to quantify unless you an economist which I am not, but essentially a stronger currency does help a country as imports cost less. Also a currency like the Euro can maintain its strength even if you as a country are doing less well. There are other benefits as well i just cant think of them of the top of my head right now.

[FunkyDexter]

Whoa, i see your not a fan of the Euro then FD !

Actually I'm a big fan, I just don't think it would work unless you federalised Europe first. I'm actually quite a believer that a European Superstate would be a good thing but I'm not convinced the current project is going to take us there - it's not in touch with the people it represents. If you could fully federalise Europe then the Euro would work just fine.

The problem isn't with the idea of a single European currency as such. The problem is that you cannot have taxes being collected and spent by a bunch of individual nations but all done in a currency that serves them all with no scope for adjustment. The independent management of national economics inevitably means that some nations stock will go up while others go down, and if you're the one going down you can't do anything about it if your currency is locked to everyone elses.

The primary tool for recovering a country that's getting weak is to improve export profits and the way that's achieved is to devalue the currency so that you're more competitive than your rival producers. At the same time it benefits a strong economy to raise the exchange rates because that means their imports get cheaper. Over time the two level back off again. everybody wins... or at least, nobody really loses.

The most important thing to understand is that these adjustments aren't a bad thing. They're actually necessary tools for managing economies.

i just dont see that all the things you have listed can be credited to being the Euro's fault

They're not the Euro's fault. It's just that the Euro (in it's current form at least) prevents us from fixing them.

once your debt passes 50% of GDP any country in the EU should be forced to cut back borrowing until they are under it again

The Euro has rules like this already. The problem is that nobody ever stopped to think about what would happen if a nation didn't follow them.

I don't want to portray Greece as a willful rulebreaker. All countries take a series of risks where they balance potential growth vs risk of a back slide if the world economy turns. At the point Greece was spending all this dough they genuinely believed they could afford it. Then the economies of the Western World collapsed in a manner nobody could have predicted. Even pessemists like me who were saying "What goes up..." didn't predict how far back down it was all going to crash. Metaphorically Greece took out an affordable mortgage just before the interest rates went up and then they got made redundant.

All of which is kind of irrelevent. The point is that now Greece IS in a position where it breaks the rules of the Euro, or at least, it's about to. And it's got no options left to avoid it. It can allow itself to be in breach in which case the Euro must expel it or it can go bankrupt and default on it's debts. Either way the money markets will recognise there's no bail out option, become nervous of investing in the other at risk countries and require higher interest rates on the bond market. The other countries won't be able to afford the increased interest rates and will follow Greece down the same spiral. The only other option is for the IMF (for which read the rest of Europe) to bail them out... but the IMF has already done that and it's clear that it can't or won't do enough to actually save the situation, at best they can provide a band aid to get them through the next few months. Of course, if they do that it sends a signal to the money markets that this is a good time to get out before the inevitable collapse that they all know is coming and, again, up go those bond interests.

The correct solution was for Greece to drop it's exchanges rates. We'd all use alot more olive oil and Greece could become profitable again. It would supress it's ability to import goods and services but they'd cope with that. their domestic situation is not radically changed by this.

there are many other European countries who are doing very well

Yeah, I was over simplifying to make a point. Generally the Northern European countries have done well while the South hasn't although there are exceptions (Iceland would seem to be a rather obvious one).




I'm no economist either but back in 1990 I was working as a data analyst for the AA's (that's the car people, not the drunks) economic forecasting department. One day I was tasked with examining the relationship between interest rates and exchange rates within the ERM. You see, the ERM limited what you could set you interest rate to within a set bracket that was agreed on when the system was set up. I built a spreadsheet and ran some simulations (this was before I learned to code). The most obvious thing I demonstrated was that, if country A was suffering from high inflation and raised it's interest rates (a fairly standard reponse to inflation because it depresses domestic spending) beyond a certain limit, while country B, seeking growth, lowered it's interest rates, a situation could arise where an investor could borrow money in country B, exchange it to country A's currency and invest it in country A at guaranteed interest rates for a year (or some aother agreed period). Because the exchange rate couldn't adjust the investor would be guaranteed that, when they exchanged the money back a year later, they would make a profit. No risk.

Three months later Germany put it's interest rates up (generally credited as a knock on effect when they chased growth off the back of reunification), the ERM collapsed and I got made redundant. Arithmetically predictable economies may be good for investors but for the rest of us... not so much.

It's always the Germans.

edit: found this link which explains it all pretty well.

[NeedSomeAnswers]

good post FD -

a question on this though

If you could fully federalise Europe then the Euro would work just fine.

Some would say that we already have a sizeable element of this as in each country collects taxes but we also pay money into a central European fund which is supposed to be used for the benefit of all EU states which is along the lines of a federalised model.

What further steps would you like to see to 'properly federalise' Europe ?

[abhijit]

good post FD -

a question on this though



Some would say that we already have a sizeable element of this as in each country collects taxes but we also pay money into a central European fund which is supposed to be used for the benefit of all EU states which is along the lines of a federalised model.

What further steps would you like to see to 'properly federalise' Europe ?

The United States of Europe!

[FunkyDexter]

What further steps would you like to see to 'properly federalise' Europe ?

I think you're really asking "what federilsation would you need for a single currency to work?" If that's right then there are 3 main elements. 1. A proper centralised bank for the whole of Europe. We have the IMF which is similar but it doesn't set any kind of base interest rate and that's absolutely key. It can (I think but I'm not sure) lend money to individual member states but the interest rates are ad hoc which makes it part of the problem rather than the cure because it will simply raise it's rates to at risk economies. 2. The collection of the main portion of tax at a European rather than National level. Member nations do already pay agreed amount into the EU but how they collect it and the amout they're taking in overall taxation is still Nationally controlled which means you can't guratentee everyone will heat up and cool down their economies at the same time. And 3. The decision on how to spend the main portion of revenues to be made at a European rather than National level. Again, Europe does set some restrictions now but the vast bulk of the decision is still in National hands.

Basically there are 4 main levers of economic control as I see it. Interest Rates, Exchange Rates, Taxation and Spending. Governing an economy requires control of all of those levers at different times. Since a single currency can only have a single set of exchange rates, creating a multi national currency removes exchange rates between it's members - therefore removing a vital lever. The exchange rate lever inevitably exists at the level the currency exists. In essence, control of the economy must be managed at the same level as the currency exists. If your currency is European then your economic control must be too. If you economic control is National then your currency must be too.

If your question was a more general "What would a Federal Europe look like?" kind of thing then I'd point to the American model. It's not perfect and we could probably learn from some of their mistakes but, on the whole, I think they've got it about right. States (which would be the equivalent of European countries) retain a fairly high level of independence and therefore their 'identity' but the main governance is carried out at the continental level. They get the benefits of being a massive trading block with few of the penalties that being a small cog in a larger governmental wheel tends to bring. It still feels like they're democracy is meaningful and, most importantly, answerable. It that last bit that I think Europe currently lacks so it has no credibility. Without credibility it's unsurprising that we're unwilling to give it control of our economies.

[NeedSomeAnswers]

FD Interesting post the only thing i dont like is this -

And 3. The decision on how to spend the main portion of revenues to be made at a European rather than National level. Again, Europe does set some restrictions now but the vast bulk of the decision is still in National hands.

Surely this will just make Europe incredibly uniform and make it difficult for different national priorities to be funded. For instance on a simplistic level one country may want to spend more on the Arts and another on Sport as long as they are not robbing all the money why does it matter why should Europe control what each country spends it taxes on ?

I can understand more central tax collection to an extent although even in America certain taxes are at a state level for instance sales and housing tax.

[techgnome]

NSA - but that's how the US works... we're taxed at all levels: school, county, city, state, fed govt, and others...each level levies a tax of some kind (some use income, some use sales, some use both) to generate revenue for their level. Now... there are some monies that are collected by teh federal govt, pooled together, then spread out among the various states, much of it is for specific purposes (health care, education, subsidies, etc) ... but monies collected at the state level is for use by the state as it sees fit.

imho, you can't have a single tax system and expect it to work equally. And the taxing authority should/must be able to distribute/use/spend/hoard the monies it collects as it sees fit, even if that means distributing it down to a lower authority. But I don't think the intent of FD's post was to suggest that the federal level would be the only taxing authority, and that it would dictate what member nations could spend on what... jsut that they should have the ability to distribute monies earmarked for specific purposes... even if that purpose is "what ever you want to use it for". If the EU collects 1 million euros... it should have the authority to decide how that is spent.

-tg

[NeedSomeAnswers]

TG that's what i was getting at.

I dont mind having centrally collected taxes so they can be spent on European wide projects as long as each nation has the right to spend or not the nation level taxes as it sees fit. That makes perfect sense to me.

even if that means distributing it down to a lower authority

i am all for more localised distribution of funds too.

So when are we implementing this again? :0)