This is really rather impressive from Phillip Inman in The Guardian. He’s managed to line up all the evidence in a row, to prove how the euro is responsible for varied calamities, then use exactly that evidence to deny that the euro is responsible. If this is how well the national newspapers talk to us about economics then what hope for public policy, eh?
To quote at length so you can grasp the full horror:
A quick look at the financial crisis and its impact on the euro area shows that there were several countries found with their pants down when Lehman Brothers went bust. Ireland, Spain and Portugal were especially hard hit.
Yet none of these countries blamed the euro for their ills. The Irish realised that they had binged on euros – borrowed at rates previously only available to bigger AAA-rated countries – to generate a property boom of extraordinary proportions, pay public sector workers as if they were commercial marketing executives and generally live high on the hog.
When the government of the day pushed through some of the most eye-watering austerity measures anywhere in Europe, the lack of equality in its impact was decided in Dublin, not Brussels.
The Spanish also spent oodles of cheap euros on a property boom and a ludicrous obsession with infrastructure that meant it either built or planned 30-plus international airports, most of which were scrapped or mothballed.
How could Madrid blame others for this frenzied attempt to escape its relatively recent agrarian past and enter the 21st century in supersonic style? These were homegrown decisions.
The Irish and Spanish property disasters were driven by interest rates. Interest rates were determined by euro membership. The two booms – and thus the subsequent busts – were entirely caused by the euro. Spain actually did pretty much everything right except for those interest rates.
To retreat back into basic theory. To have the one currency over a wide area is a good idea as it means that we’ve a common unit of currency to trade over that wide area. This increases efficiency as the ability to divide and specialise depends upon the size of the market. As it turns out this expansion of the euro across a larger area wasn’t all that powerful an effect. The Single Market was – the currency not so much. Both expanded that area across which we could divide and specialise, the currency being such a minimal addition that most studies of the effect find it near or around zero. Nice in theory not so much of an issue in reality.
To have the one currency over a wide area is a bad idea as it also means that we’ve the one risk free interest rate over that area. And the wider the area the more likely it is that there will be asymmetric economic conditions requiring different monetary policy and interest rates. Forcing just the one policy on all of that wider area could be non-optimal.
Which is what gives us optimal currency areas – what’s the area across which that first – and other such – effects produce benefits before we get to an area so large that the dis-beneficial effect predominate and the net effect is to hinder economic growth?
The answer is that the eurozone is very definitely too large to be optimal. Our proof being those Spanish and Irish property booms. For, at euro introduction, the German economy was really rather poorly. So, interest rates across the entire eurozone were pretty low. That’s obviously how it’s going to be as well – even if we weight matters by size of economy we’re going to end up setting -zone interest rates to favour the largest part(s) of our combined -zone. Which is what was done.
Those euro rates were vastly too low for both Ireland and Spain. Which triggered those property booms. Spain even did the right things as well. Raised deposit requirements, increased the capital banks must hold against mortgages and all that. And still the effect of too low interest rates created the mother of all property booms.
The proof of the shiteness of the eurozone is not the crash, it’s those booms before it.
Now note again what Mr. Inman does. Gives us that evidence and then insists that the euro had nothing to do with it. Entirely the opposite of the objective reality. And as I say, if this is what is pumped at us by the national newspapers then what hope decent economic policy?
Do note that even Gordon Bloody Brown managed to get the economics right here, his five tests for euro membership were concentrated on exactly this point. Monetary union demands interest rate union and there’s just no way that economies as divergent as Spain, Germany and the UK are going to be in lockstep as to what interest rates should be. Therefore monetary union is non-optimal.