Tuesday, June 12, 2012

Cullen Roche — Tear Up Your Paper Money?

Cullen observes that the problem in the EZ is essentially institutional. Put most simply, it is the defects in institutional design of the currency union that are now undermining trust in the currency.

Read it at Pragmatic Capitalism
Tear Up Your Paper Money?
by Cullen Roche

The question now is what it will take to correct the institutional arrangements, as well as which of the proposed ways are politically practical and sustainable over the long run. The alternative is either abandoning the institution, which would mean abandoning the euro as the common currency, or else addressing the asymmetry at the foundational level by limiting the membership to nations that are economically symmetrical. This would involve some countries leaving the euro, at least temporarily. But one something is taken apart, it can be difficult getting it back together.

On the other hand, I think that we have to be wary of imputing too much weaken to the euro due to lack of trust in the currency at this point. The capital flight in the EZ doesn't seem to be chiefly out of the EZ (yet), but rather a great deal of it is occurring within the EZ, as funds flow from the periphery to the core, especially into German governments and German banks, exacerbating the asymmetry.

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