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EUROPE / But M. Macron, the Euro has already failed
The only question is: What do we do about it?
Date of publication at Tlaxcala: 03/05/2017
Translations available: Italiano 

But M. Macron, the Euro has already failed
The only question is: What do we do about it?

Tim Worstall


Emmanuel Macron is one of those running to be the next French President. And as he does so he really needs to get up to speed with his economics. For he claims that the euro could fail within the next 10 years unless something is done about it. This is an error, a serious one, for the euro has already failed. The only interesting or useful question left is what do we do about it?

Emmanuel Macron, France's former economy minister. (Credit: Christophe Morin/Bloomberg)

The euro may not exist in 10 years' time if Paris and Berlin fail to bolster the single currency union, French presidential candidate Emmanuel Macron said on Tuesday.
Marcon said he believes the current system benefits Germany at the expense of weaker member states.
Macron was economy minister under Socialist President Francois Hollande until he resigned last year to create his own political movement and stand as an independent candidate in this year's presidential election.

It doesn't in fact benefit Germany. An independent German currency would have a much higher value than the current euro--thus the euro is making Germans poorer by that decline in the foreign value of their currency.

“The truth is that we must collectively recognise that the euro is incomplete and cannot last without major reforms,” Macron said in a speech at the Humboldt University in Berlin.

Speaking in English, he added: “It has not provided Europe with full international sovereignty against the dollar on its rules. It has not provided Europe with a natural convergence between the different member states.”

You can't and won't promote convergence by forcing people into the one currency and thus one monetary regime. That's just not how it works--you can only have an effective single currency when economies covered are already converged. Most importantly, given that one currency does mean one monetary policy, you need all the members to have correlated economies, to be passing through the business cycle at the same speed and time. This is something which simply is not true of the eurozone economy and it's most unlikely that it ever will be either. Thus it was a bad idea to begin with.

As Milton Friedman noted way back when before it all started:

If one country is affected by negative shocks that call for, say, lower wages relative to other countries, that can be achieved by a change in one price, the exchange rate, rather than by requiring changes in thousands on thousands of separate wage rates, or the emigration of labor. The hardships imposed on France by its "franc fort" policy illustrate the cost of a politically inspired determination not to use the exchange rate to adjust to the impact of German unification. Britain’s economic growth after it abandoned the European Exchange Rate Mechanism a few years ago to refloat the pound illustrates the effectiveness of the exchange rate as an adjustment mechanism.

Since then we've had massive property booms (and the inevitable crashes) in Ireland and Spain. Driven by euro interest rates that were too low for their economies and set for the benefit of that struggling German one. Post crash the ECB kept interest rates much too high for too long. Italy has had pretty much no economic growth for two decades, Spain's youth unemployment rate is still up near 50%. Greece of course is a disaster and even Finland is having to grind through an internal devaluation.

What's worse is that none of the economic benefits touted have arrived either. There was the claim that there would be much more cross border trade--that just hasn't turned up. As it happened, the estimates of such were based upon the combination of previous monetary unions, monetary unions that had also coincided with customs unions. And we've now found out that it was the customs union (which is the Single Market) which is the important part, not the monetary union.

There are really only two viable policies to follow how given that we do know that the euro is a failure. We could try to introduce fiscal union. This would be like the US system--money flows into Washington DC and then out again. Such redistribution mitigates the effects of that single monetary policy. But this requires that Europeans will send 20% of GDP to Brussels to be spent by the bureaucrats there. Or, as we might put it, that Germans really will be paying Greek pensions.

It. Ain't. Gonna. Happen.

The other policy is to admit failure, dismantle the thing and declare victory. Which is what we should do. The euro failed, the only route to making it better is not politically possible. Thus best to dismantle it before events do that for us and in the chaos that forcing the issue would cause. 

Courtesy of Forbes
Publication date of original article: 12/01/2017
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Tags: EuroFranceElectionsEuropean UnionGermanyMilton FriedmanEconomyECBBrusselsGDP

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