This editorial in the Wall Street Journal provides an excellent introductory comment to the European debt crisis now underway:
The German Bundestag voted last week to expand the European fund established last year to bail out Greece—or, rather, Greece’s creditors. In doing so, it also moved the euro zone one step further away from the bloc’s founding principle that its members would share a currency, but be responsible for their own fiscal policies within that currency zone.
In the current global environment of floating exchange rates, this idea seemed radical, and many people thought the experiment was doomed to failure. Yet historically speaking, the real novelty is our system of fiat currencies and floating exchange rates.
(H/T Detlev Schlichter)
I think this article is terrible, because it doesn’t properly delineate the differences between a fixed exchange rate regime, and a floating rate regime.
My preference is for a fixed exchange rate regime, but – as the past century has shown – such a regime is only sustainable provided monetary policy is appropriate. Unlike the gold standard, the euro doesn’t fulfill this condition.
Appropriate central bank policy goes beyond imposing the European Stability Growth Pact. The views of mainstream economists was that the main consequence of increasing the money supply was CPI inflation, while underemphasizing or being oblivious to other form of economic distortions that it creates (e.g. current account deficits, damaging the price
system, asset bubbles, etc.).
It may therefore be claimed that a floating exchange rate regime is perhaps better than fixed exchange rates so long as we live in a world of improperly managed fiat currencies.
I think there are actually lots of really good points in the article.
According to my reading, it was really aimed at those who see exit from the Euro and devaluation as some sort of panacea. At those who think that the problem was simply that the Euro doesn’t form an “optimal currency area”, and that if only it did, the wise monetary central planners would ensure that all is well.
My impression is that the author would prefer a monetary system based on gold.
The author of the WSJ article omits any mention that the European Central Bank was responsible for the huge economic imbalances – the magnitude of which would not have happened under a gold standard, and would have been automatically self-correcting. Even if the European Stability and Growth Pact had been imposed, it would have been insufficient anyway.
There needs to be some kind of debt write-down, and the best way to achieve that i.m.o. is for the EMU to break-up thus allowing a currency devaluation. I like Ambrose Evans-Pritchard’s solution – for the Southern states (perhaps including France) to retain the existing euro, with the Northern states using a new currency.
Not economic growth but soconomic (social & economic) viability!
As pointed out in a comment to a related NYT editorial (Killing the Recovery, 9/28/11 post 110
[http://community.nytimes.com/comments/www.nytimes.com/2011/09/29/opinion/killing-the-recovery.html?permid=110#comment110]), it aint necessarily so – particularly if thinking and acting along worn-out tracks is not required!
Re-introducing a local-content-oriented complementary currency along-side the Euro is by no means ruled out by current EU treaties or
directives (www.solami.com/outofthebox.htm). Since 1934, Switzerland’s complementary WIR franc system has provided for small and
medium enterprises a uniquely effective anti-cyclical & anti-depression local monetary system which kept productive forces employed,
tourist infrastructures in use and machinery humming – even and particularly when the chips were down. All of these productive factors
have thus been oriented towards serving human beings and their social structures. In the Greek and other cases, a corresponding
refocussing of the attention and energies away from capital, funny money, bonus-driven mergers & acquisitions, and growth towards
human-centered objectives might provide a practical and dignified organic way out of the current mess.