Chillin' out till it needs to be funded
Unfortunately, just when the Lib Dems finally joined the government in the UK, the Euro almost seems ready to be consigned to history as an experiment. Its detractors, do not realise however, that it has a very large spread and is already a primary alternate reserve currency and the germans can make it without the french as well. However, the assymetric deficits / shocks are going to be a big test and in better times this would have been theLondon decade with the Euro in the lead..all noes from ‘nobelist’ Paul Krugman in the NYT..
When the idea of the euro was first broached, there was extensive debate about whether Europe constituted an “optimum currency area”; the key question was whether European nations would have an adequate way to adjust to “asymmetric shocks”, which left some economies more depressed than others. When countries have their own currencies, they can deal with such shocks, at least in part, by devaluing — an argument made most eloquently by none other than Milton Friedman (pdf). Lacking that alternative, something else is needed.
So now we have a euro crisis, which — to me at least — hinges crucially on that very issue. What makes Greek problems so intractable is the fact that there’s little hope for growth for years to come, because Greek costs and prices are out of line and will need years of painful deflation to get back in line. Spain wouldn’t be in trouble at all if it weren’t for the fact that the bubble years left its costs too high, again requiring years of painful deflation.
Yet if you look at many discussions of the euro crisis, they simply ignore the adjustment issue. Not to especially bash Marco Pagano, but how can you write a whole essay on the euro’s troubles without so much as mentioning the problem of getting relative costs and prices in line?
It’s tempting to psychoanalyze here — to note that if you pretend that it’s all about fiscal profligacy, the problem seems solvable with a bit more discipline, but if you admit that the original optimum currency area issues are key to the situation, you wonder whether the common currency really makes sense.
krugman as always, makes good preparatory ground by stating the obvious here as well…[incl. the ahem emphasis ours kind of london thanks..]
The IMF has a new report (pdf) on fiscal troubles ahead; it’s characteristically full of useful information. But the way it’s written, it’s actually quite hard to figure out what’s going on — and when you do decipher it, the story is quite different from the impression most people will get.
You see, what the report says is that there has been a fundamental deterioration in the fiscal outlook for advanced countries. Not only are they running up a lot of debt in the crisis, but — and much more important — they will emerge from the crisis with large structural deficits that weren’t there before. So spending cuts and tax increases loom.
But here’s the question: where are those structural deficits coming from? It’s not interest on the debt: the IMF shows a large increase in primary (non-interest) structural deficits. So is it permanent increases in spending? No: the report shows that discretionary spending increases are a minor cause of rising deficits even in the crisis, and these increases will be reversed as stimulus winds down.
YES, MR. KRUGMAN, they can’t see the Elephant in the room..