Thursday, March 4, 2010

Milton Friedman and the Euromess

« Maybe Milton Was Right About the Euro » writes Desmond Lachman in The American (February 23, 2010).

Excerpts :

« The main motivation for the euro’s creation was political rather than economic. It was thought that creating a single European currency would advance the dream of an integrated Europe that could rival the United States on the international stage. While it was recognized that the euro rested on the shakiest of economic fundamentals, it was hoped that the single currency would force economic change on its wayward Mediterranean member countries. It would do so by requiring those countries to undertake deep structural economic reforms and to abide by the strict Maastricht Treaty rules for individual member countries’ budget policies.

Sadly, economic events have not played out as the euro’s founders had hoped. »


« The main threat to the euro’s survival in its present form is the large domestic and external imbalances of its Club Med countries and of Ireland. These imbalances have reached such proportions that their correction within the straightjacket of continued euro-zone membership will necessarily involve many years of painful deflation and deep economic recession. Indeed, without the assist to competitiveness from currency devaluation, prices and wages in these countries will need to fall by around a cumulative 20 percent over the next few years if they are to regain international competitiveness. Similarly, attempting to radically reduce their budget deficits to more sustainable levels, without the boost to exports from a cheaper currency, could result in cumulative output declines for these countries well in excess of 10 percent. »


« While periodic European bailouts of the Mediterranean countries and Ireland are to be expected, the question will remain as to whether these bailouts will do much to solve these countries’ underlying unsustainable public finances and loss in international competitiveness. Rather, it seems that all that these bailouts will do is kick the can forward without averting the final day of reckoning. »

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