Monday, March 2, 2009

Did you say « asymmetric shock » ?

According to the Optimal Currency Areas (OCA) theory, a common currency is especially vulnerable to “asymmetric shocks” whose impact affects differently different member countries. In that case, differentiated national macroeconomic policies are required to accommodate the nation specific consequences of the shock. Here it comes.

Under the title: « Growing Economic Crisis Threatens the Idea of One Europe », the New York Times reports about the European Union’s leaders meeting of Sunday. The authors first quote Stefan Kornelius, foreign editor of the Süddeutsche Zeitung:
« The European Union will now have to prove whether it is just a fair-weather union or has a real joint political destiny. We always said you can’t really have a currency union without a political union, and we don’t have one. There is no joint fiscal policy, no joint tax policy, no joint policy on which industries to subsidize or not. And none of the leaders is strong enough to pull the others out of the mud.”

While most politicians and commentators deplore this “lack of coordination”, it should be understood as a natural consequence of the decentralization trend of the last few decades, and thus one should not expect much further integration of basically independent nations in the near future. It seems fair to say that the “joint political destiny” is proving more and more elusive.

The New York Times journalists then go on analyzing the consequences of the current economic crisis:

“The problems are basically twofold: within the inner core of nations that use the euro as their common currency, which together have an economy roughly the size of the United States’; and within the larger European Union.

The 16 nations that use the euro […] must submit to the monetary leadership of the European Central Bank. That keeps some members hardest hit by the economic downturn, like Ireland, Spain, Italy and Greece, from unilaterally taking radical steps to stimulate their economies.

[…] Within the larger European Union, fissures are growing between older members and newer ones, especially those that lived under the yoke of Soviet socialism. Some of (these countries) […] are in a state of near meltdown.”

My conclusion: How far common monetary policies - and the euro - can withstand diverging national economic conditions now remains to be seen. An interesting laboratory experiment indeed.

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