Friday, June 12, 2009

Questioning euro membership.

« One size fits none » is the title of an article on the euro area in the June 11th issue of The Economist, here .

The journalist quotes at length Jordi Gali, a professor at University Pompeu Fabra who expresses fears about the capacity of Spain to recover while handicapped by an overvalued, because nominally fixed, exchange rate. Well, at least a few European academics hard pressed by the facts begin to recognize - at last though willy-nilly - the validity of basic economic reasoning. That was long overdue.

But Gali then asserts “No one sold the euro as a solution to high unemployment”. Sorry but this, again, is totally contrary to the facts. The official slogan of the campaign for the creation of the euro that Mr. Delors, Mr. Trichet and national politicians repeated over and over was that the euro would boost growth through price stability and shield the European economies from recessions and financial shocks. Sadly most European economists helped obligingly to spread such nonsense, that they concealed in a mass of irrelevant technicalities and byzantine discussions destined to divert the public’s attention.

Some of them went so far as pretending that imposing a single currency on a non optimal monetary zone would make it optimal ex post! In other terms a currency could force, by its very existence, heterogeneous economies to converge. Others demonstrated that a single currency would boost trade between economies by multiples of 100% (!), way beyond what free trade would achieve. And the creator of the optimal currency area concept, Nobel prize winner Robert Mundell, developed and ad hoc argument in favor of the euro exactly at odds with his own theory thus ridiculing the Nobel Jury.

This was not an episode for economists to be proud of. Only two top economists kept consistently critical of this irrational euro exuberance: Paul Krugman who showed that a common market was more likely to increase structural divergence between member economies rather than foster convergence of specialization, and Martin Feldstein who from the start diagnosed the euro as an economic liability in search of a political rationale. Milton Friedman, an early defender of flexible exchange rates, also criticized the euro, but occasionally only.

Readers of this blog can check in L’Erreur européenne (Grasset, 1998) what could easily be diagnosed in advance, before the fact, on the basis of straightforward economic theory.

The next question, however unorthodox, now is: who should exit, and how. Again, almost all European economists pretend that the cost would be huge. But again they are wrong.

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