Thursday, January 15, 2009

Reality strikes back

From the Financial Times (January 11) the following comment by David Marsh in a paper titled "France, Germany and fissures in the eurozone":

"Emu had required improbable compromises - notably, that it would work without substantial fiscal tranfers between countries of markedly different economic performance. Using a single currency to lash together 16 disparate nations has had effects similar to those among occupants of a life raft on a storm-tossed sea. The euro has provided members with an aura of robustness but also made them more prone to fissures caused by disturbances in their internal balance of forces.

... fixing exchanges rates among countries with disparate patterns of prices and productivity has led to changes in relative competitiveness. Since 1999, Germany has gained an overall competitive advantage of more than 10 per cent, while Italy has suffered a loss of nearly 40 per cent, according to Organisation for Economic Co-operation and Development figures based on unit labour costs. During much of the euro's first decade, the positive impact of generally low, stable Emu interest rates largely outweighed the negative influence of disrupted competitiveness. However, as economies contract, papering the cracks will become more difficult".

Readers of my pages in Le Figaro ("Cheminement du Futur") knew that already in 1995. Those who bought l'Erreur européenne also knew that the euro would prove detrimental to growth in many European countries (Grasset 1998, and Euro Error, Agora, 1999), while readers of my 2002 paper "Les promesses de l'euro: tout était faux" could plumb the depth of offical lies (sorry, I mean "political correctness") regarding the alleged economic advantages of the common currency.

A few American colleagues (Milton Friedman, Martin Feldstein) clearly explained that the eurozone was not an "Optimal Currency Area" and thus would be vulnerable to an asymetric shock while lacking the US compensating mechanisms. But most economists in the European academic Establishment, and in the press, did not do their homework and evaded their responsiblities by arguing about details and procedures while endorsing, at best with very minor reservation, the official creed. Some of them faulted the ECB interest rate policy stance, but cautiously avoided any direct criticism aimed at the euro.

By usual standards however, a decade for some truth to emerge from a sea of misinformation is not that long after all...

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