The Great Hope Of 2015; The Greek Election Will Smash The Euro
It’s New Year’s Day so time to prognosticate, forecast and plain ol’ jus’ tell everyone what we hope for. And my big hope, the big wish, for 2015 is that the upcoming Greek election will end up smashing the euro as a viable currency covering much of the European Union. I will admit that I am hugely biased upon this subject, thinking that the European Union itself is a bad idea and the euro, as currently constituted, is an even worse one. I don’t think that either should exist in fact: which does, I assure you, mark me out as being something of an extremist. However, now that you know that you can weigh my bias as you wish in what follows.
The basic economic insight we need is the optimum currency area. Really explored by Robert Mundell (who got the Nobel in 1999, just before the launch of the euro, something that should give many pause for thought) the basic thought is that, as with so much in economics, there is actually no solution. There’s only a series of tradeoffs. Sure, there are benefits to everyone using the same currency: lower transactions costs leading to larger trading areas and thus greater general efficiency in the economy say. There’s also disbenefits: sharing a currency will mean that different areas will need to have the same monetary policy as well. And there are times when this is a seriously bad idea. In some areas the benefits will outweigh the costs: in others, the problems the benefits. This is obviously an ever changing feast as well, as communications methods, technologies, trading patterns change and so on.
One general rule is that the larger the area the less likely it is to be an optimal currency area. The second is that the more variable the economies within it the less so. And the third that is is possible to increase the size of the optimal area by having political and fiscal unity across the entire area.
This was all looked into in the late 1990s as the euro came into being. And it was (and usually still is) generally accepted that Germany and the Benelux countries (Holland, Belgium and Luxembourg) probably did make up an optimal currency area. Switzerland and Liechtenstein obviously are. It’s probably not true that the UK is: the effects of interest rate changes are so wildly different upon the manufacturing industry of the Midlands and the North as opposed to the service industries of London and the South that despite the fact that it has been a currency area for centuries now it’s still probably not an optimal one. Various people noted that it’s only in recent decades that it could be said that the US is an optimal currency area: and it’s not overly mischievous to point out that the Great Crash of real estate prices was exactly such a shock because prices right across the country had never been coordinated in that manner before. That prices react the same way at the same time is one of those things that shows you might be an optimal currency area.
http://www.forbes.com/sites/timworstall/2015/01/01/the-great-hope-of-2015-the-greek-election-will-smash-the-euro/
