Skip to main content

The Euro's Troubles

Image
By
The excerpt below is from a keynote address gave in 2000 by "Uncle Milt" (or Milton Friedman as he's more commonly known). With all that is going on in Europe currently, it's not likely the question of whether the Euro is long-term sustainable will go away.

---

"The euro is one of the few really new things we’ve had in the world in recent years. Never in history, to my knowledge, has there been a similar case in which you have a single central bank controlling politically independent countries.


The gold standard was one in which individual countries adhered to a particular commodity—gold—and they were always free to break or to leave it, or to change the rate. Under the euro, that possibility is not there. For a country to break, it really has to break. It has to introduce a brand new currency of its own.

I think the euro is in its honeymoon phase. I hope it succeeds, but I have very low expectations for it. I think that differences are going to accumulate among the various countries and that non-synchronous shocks are going to affect them. Right now, Ireland is a very different state; it needs a very different monetary policy from that of Spain or Italy.

On purely theoretical grounds, it’s hard to believe that it’s going to be a stable system for a long time. On the other hand, new things happen and new developments arise. The one additional factor that has come out that leads me to raise a question about this is the evidence that a single currency—currency unification—tends to very sharply increase the trade among the various political units. If international trade goes up enough, it may reduce some of the harm that comes from the inability of individual countries to adjust to asynchronous shocks. But that’s just a potential scenario.

You know, the various countries in the euro are not a natural currency trading group. They are not a currency area. There is very little mobility of people among the countries. They have extensive controls and regulations and rules, and so they need some kind of an adjustment mechanism to adjust to asynchronous shocks—and the floating exchange rate gave them one. They have no mechanism now.

If we look back at recent history, they’ve tried in the past to have rigid exchange rates, and each time it has broken down. 1992, 1993, you had the crises. Before that, Europe had the snake, and then it broke down into something else. So the verdict isn’t in on the euro. It’s only a year old. Give it time to develop its troubles."

—
Milton Friedman. Keynote address at "Revisiting the Case for Flexible Exchange Rates" Conference organized by the Bank of Canada, November 2000.
Available at http://www.bankofcanada.ca/wp-content/uploads/2010/08/keynote.pdf.
Labels:

Popular posts from this blog

Diversification: Disciplinarian of Disciplinarians

By
Disciplined diversification works when you do and even when you don't want it to. Diversification in effect forces you to sell the thing that has been doing so well in your portfolio and to buy the thing that hasn't. While this makes rational sense, it is emotionally difficult to execute. Think back to the tail end of 2008--were you selling bonds and cash to buy stocks? Most likely you weren't unless your advisor or some sort of automatic trigger did it for you. Carl Richards of www.behaviorgap.com provided a good reminder of how diversification works in a recent NY Times blog post. The diversification he discusses here is more so related to equity asset-class diversification but also touches on the three basic building blocks--equities, bonds, and cash. He doesn't discuss alternative asset classes -- an asset class that doesn't fit neatly into the three basic categories -- being used to further diversification, but that's a detailed topic for another day. ...
Read more

Should We Go Back on the Gold Standard?

By
If you watched the Republican presidential debates, you might have noticed that a number of  candidates yearn for a return to the gold standard—that is, that every dollar issued by the government would be backed by a comparable value in gold bars that were stashed away in a government vault. Sen. Ted Cruz of Texas argued that the dollar should have a fixed value in gold, and Sen. Rand Paul of Kentucky added that printing money without backing in the precious metal destroys the value of our currency. Mike Huckabee, former governor of Arkansas, thinks that if not gold, then the dollar could be pegged to a basket of commodities. All are mostly concerned that printing money will cause runaway inflation.   But there may be several problems with this return to the fiscal system of the late 1800s and early 1900s. One is that inflation has barely budged even as the Federal Reserve Board was piling one QE stimulus on top of another, and the government was adding records amoun...
Read more

What Does $100 Buy You in Your Home State?

By
A new map released by the Tax Foundation shows exactly how far $100 would go in all 50 states. Using recently released data from the Bureau of Economic Analysis, the Tax Foundation was able to show how the varying prices of goods, housing and income taxes in each state can impact consumers’ purchasing power. Southerners and Midwesterners have a serious edge over those along the East and West Coasts. A hundred bucks goes the furthest in Mississippi, where $100 will buy you what would cost $115.74 in another state that's closer to the national average. The next low-price states are Arkansas, Missouri, and Alabama. Ohio comes in at an encouraging $112.11 Meanwhile, $100 would only be worth $84.60 in the District of Columbia, the priciest state, $85.32 in Hawaii and $86.66 in New York. http://finance.yahoo.com/news/how-much--100-is-worth-in-your-state-152310027.html Click the Map Read More
Read more