In May, Greece will start its eighth year as a patient in the hospital for financially wounded eurozone countries. Having joined Europe’s currency union in January 2001, and having received the first of three rescues worth a combined €260bn in May 2010, the country is on course for a fourth aid transfusion next year. Barring wholly improbable changes in the politics of European crisis management, Greece will earn the unwanted distinction by late 2019 of having spent more of its eurozone existence in an intensive care unit than outside...
The third, arguably most important, part of the question is whether the eurozone-IMF rescue programmes have helped to modernise the Greek state. All the creditors, and many of the country’s politicians, are doubtful. Tax collection rates have actually fallen since 2010, despite efforts to strengthen the tax system. “The state of the [public] administration and of the health, education and justice systems is worse than at any time in the recent past,” says Yannos Papantoniou, a former finance minister.
The article also points out the potential political backlash in other Eurozone members as it dawns on their populace that they're footing the bill the Greek government's continued existence.
The other half of the chief economists, like me, recognised that a single currency would be introduced, no matter how nonsensical the economics, since it was a political project. (The economics being bad, the politics was even worse: the end of democracy in Europe). They agreed with me that it was going to be a disaster.
In the long run, the Euro and the fiat Dollar have the same future ahead of them. There are some simple, basic economic truths that this author lays out, in detail, in the longer quote below. The problems with the Euro and the fiat Dollar aren't opinions. They're economic birds that will come home to roost, sooner or later, around the world... and it won't be pretty when they crap their nests.
Sadly, Professor Werner omits two major points:
1) The economies of California and Mississippi are as diverse as those of Germany and Greece; only a hundred-plus years of history blind most people to the impact a central, fiat currency has had on the various sub-economies of the US.
2) The "monetary policy" he praises as a tool for the politician is in fact a political tool that can only distort, not create, a robust economy. Place money creation in the hands of the politicians, and sooner or later, you get politicized money, not economic money. The bolded bit in the quote above highlights that fact.
Now, about that structural problem with the Euro...
Consider first the 1990s. Like many economists, at the time I pointed out that the plans by the eurocrats to introduce a single currency were thoroughly misguided: monetary policy is the most powerful policy arm, and there is no reason why any government should amputate it. As I argued then, historically the German D-Mark had been strengthening since its introduction in 1948 against the currencies of its neighbours, and this reflected – and compensated for – increased German competitiveness. Their weakening currencies allowed German trade partners to keep their export industries in business and their workers employed. By introducing a single currency, future revaluations of the German currency were disallowed. This amounted to a de facto future devaluation of German purchasing power, revaluation of the currencies of the other European countries, and hence would render non-German economies less and less able to compete against German exports over time.
To economists – even of the mainstream ilk – it was clear what would have to follow: Unable to depreciate their currencies, countries such as Spain, Italy, let alone Greece would need to conduct what is euphemistically called an ‚internal devaluation‘, i.e. wages would have to fall significantly and domestic purchasing power would have to be reduced. Countries refusing to implement such austerity policies or trying to circumvent them would face ballooning trade deficits with Germany and the need for ever greater borrowing from the German central bank (via what came to be known as TARGET2). Their debt would swell, until reaching an unsustainably high level, and then something drastic would have to happen – default, exit from the single currency, or both. It was an almost unique instance where most economists – famous for disagreeing – agreed.
But politicians just knew they could legislate basic economic truths out of existence.
____________________________________________________ Economics puts parameters on people’s utopias. ~Peter Boettke "It's the voter's fault" is victim-blaming in its purest sense. ~Don The 'social contract' is to the politician what 'original sin' is to the priest. ~Don The vision of the helpful and protective state is the most pervasive and counter-productive ideology in the world today. ~Don ____________________________________________________