Thursday, July 23, 2015

Steve Randy Waldman — How to fix the Euro

This proposal would not fragment the Eurozone. The Euro would remain the universal unit of account and medium of settlement. [2] The proposal would loosen the strictures on government expenditure compared to existing arrangements, but importantly, the risk associated with that extra fiscal freedom would be borne entirely by domestic constituencies, not by external creditors. It would restore to Eurozone states some of the tools they lost for managing domestic shocks, without requiring unpopular transfers or destructive borrowing from other states. It would strengthen Eurozone states, as polities.
The lesson of the Asian Financial Crisis and the extraordinary reversal of financial flows that many Asian countries were able to engineer is that the strength of a state is largely a matter of its capacity to mobilize domestic risk-bearing, rather than rely upon external finance. Eurozone institutions unintentionally short-circuited that capacity. It’s time to restore it.
How to fix the Euro
Steve Randy Waldman


Ralph Musgrave said...

As Waldman says, the value of each script note, in terms of Euros, varies with the time till redemption. That strikes me as far too complicated for 99% of citizens. People won't touch them. But perhaps I've missed something. Script worked in California quite recently. Anyone like to tell us how that worked?

In contrast to script, having two currencies circulate (e.g. the Drama and Euro) wouldn’t be a problem. Numerous countries have two currencies, e.g. Peru.

NeilW said...

"This proposal should be implemented universally within the Eurozone"

Spoken like a true lefty. What it is about these people that can only think in global, everybody-is-the-same-and-moving-in-the-same-direction ideas.

The problem in the Eurozone is precisely that everybody is going in different directions and the more powerful members are imposing their view of the direction on the other members.

It's too big and will fragment. Stop trying to paper over the cracks with grandiose sounding big ideas.

You need ideas that can be implemented unilaterally by an elected structure - without input or regard for any other elected structure elsewhere. That is what 'resilience' is all about.

NeilW said...

"But perhaps I've missed something."

Brixton pound, Bristol pound, Gibraltar pound and all the other 'local currencies'. There's a promise to convert back to the denomination, but no absolute guarantee.

People believe it and use it - but not universally.

But why bother with all this. It is just sticking plaster trying to prop up a failed operation by inventing half baked halfway houses that satisfy nobody.

Ralph Musgrave said...

Neil, I don't think a local currency running alongside a more powerful currency is too bad. It's not perfect, but no one in central / South America (e.g. in Peru) objects all that much to a local currency running alongside the US dollar.

Likewise, the Bristol pound is not ideal: it wouldn't be needed if there was full employment in Bristol. But people in Bristol don't object to it.

NeilW said...

"Likewise, the Bristol pound is not ideal: it wouldn't be needed if there was full employment in Bristol."

It's not really for that purpose. What it is all about is reducing leakage to other areas and keeping the spending local. That's exactly what the article was about - the problem is domestic funding.

It's because they want fixed exchange rates because Keynes mentioned it at some point and therefore it must be a good idea and yet they want guaranteed 'domestic' spending in a particular area - and they can't square the circle because they can only think in terms of countries, not currency areas.

Once you change your viewpoint to a currency area and realise that it is not bounded by borders - whether Bristol, Britain or Bangalore - then it becomes a lot easier to see what is going on.

Brian Romanchuk said...

If there was any chance of this working, it would be rejected by euro area groupthink.

Why would German policy makers fool around with this? They do not care what costs are being imposed on the periphery. Since they will not play along, the objective of universality is impossible.

As Neil Wilson says, governments will have to unilaterally create such currencies, and hope that they are consistent enough with EU law that they are not crushed by the Eurogroup engineering a bank run on their countries. My money would be on the Eurogroup crushing the country, unless the country was big enough (France, possibly Italy).