Why the Euro was always a bad idea

Christopher Caldwell writing in the Weekly Standard why the Euro is collapsing and probably can't be saved:

As we contemplate the macroeconomic storm that is now passing through Europe, we must bear in mind that this is a storm that the EU's promoters knew would come. The euro's designers understood Rahm Emanuel's philosophy about not letting a crisis go to waste. "Europe will be forged in crises," the European Community's founding father Jean Monnet wrote in his memoirs, "and it will be the sum of the solutions brought to these crises." When the French statesman Jacques Delors laid out his plan for the euro in the late 1980s, he drew a clear trajectory: A common market had made possible a common currency. A common currency would make possible a common government. But how would that happen? After all, if a currency worked well within the existing political arrangements, there would be no reason for those arrangements ever to change. New institutions could result only from the currency's blowing up. Economic crisis would be the accidentally-on-purpose pretext for replacing a system based on parliamentary accountability with a system based on the whims of a handful of experts in Brussels. Europe's countries now face the choice of giving up either their newfangled money or their ancient national sovereignties. It is unclear which they will choose.

As Caldwell makes clear, this weakness of the Euro is a feature, not a bug. It was necessary to get everyone on board to have national sovereignty trump good monetary policy:

European national governments wanted a common currency, but they were not ready to give up their sovereignty. So they came up with a compromise. They figured that if European governments could converge sufficiently in their style of budgeting, they could do without a central budgetary authority. Their plan for common-currency membership rested on an independent central bank and three regulatory pillars: First, no bailouts (as stipulated in article 125 of the Maastricht Treaty). Second, no "monetization of debts"-that is, printing money to pay off creditors (article 123). Third, no crazy budget deficits (as laid out in the so-called Stability and Growth Pact, which limited them to 3 percent). There was a logical problem with this structure. As the French economist Charles Wyplosz pointed out recently, if the no-bailout clause were really credible, then there would be no need for the Stability Pact, since countries that ran excessive deficits would be disciplined by markets. But Europeans lacked the discipline even for the Stability Pact. Greece cooked its books to conform with it. Italy was given a waiver on its total-debt provisions, and Prime Minister Romano Prodi called it a "Stupidity Pact." France and Germany flouted it. And last spring, European authorities both bailed out Greece and (despite some accounting trickery to disguise the fact) monetized its debt.
The architecture of the euro had other elements. Most monetary unions-consider our dollar-have automatic transfers that smooth imbalances when one region of a currency area is booming and another is slumping. If California is stagnant, its residents collect more in unemployment benefits and pay less in taxes. If Texas is getting rich, tax revenues go up and welfare expenditures go down. But as the Harvard economists Alberto Alesina and Edward Glaeser have shown, people are reluctant to pay taxes to help out those with whom they don't feel they have much in common. Just as a lot of suburban Americans saw the black, inner-city poor as "welfare queens" in the 1970s and 1980s, frugal Germans fear that their savings will be shipped to Greece to fund retirement-at-50 for a bunch of mafiosi.

We will probably see a spate of articles that try to answer the question "What happens to Europe with no Euro?" The common market isn't going anywhere so it probably won't change that much, except perhaps to make European nations more nationalistic in their trade practices.

And the European Union isn't going anywhere either so expect the same kind of socialist nonsense being handed down from the EU parliament that it has already been dispensing. But they will have less influence than before, which can only be a boon to countries like Great Britain, France, and Germany whose economies suffered under the stifling rules of the Euro.



Christopher Caldwell writing in the Weekly Standard why the Euro is collapsing and probably can't be saved:

As we contemplate the macroeconomic storm that is now passing through Europe, we must bear in mind that this is a storm that the EU's promoters knew would come. The euro's designers understood Rahm Emanuel's philosophy about not letting a crisis go to waste. "Europe will be forged in crises," the European Community's founding father Jean Monnet wrote in his memoirs, "and it will be the sum of the solutions brought to these crises." When the French statesman Jacques Delors laid out his plan for the euro in the late 1980s, he drew a clear trajectory: A common market had made possible a common currency. A common currency would make possible a common government.

But how would that happen? After all, if a currency worked well within the existing political arrangements, there would be no reason for those arrangements ever to change. New institutions could result only from the currency's blowing up. Economic crisis would be the accidentally-on-purpose pretext for replacing a system based on parliamentary accountability with a system based on the whims of a handful of experts in Brussels. Europe's countries now face the choice of giving up either their newfangled money or their ancient national sovereignties. It is unclear which they will choose.

As Caldwell makes clear, this weakness of the Euro is a feature, not a bug. It was necessary to get everyone on board to have national sovereignty trump good monetary policy:

European national governments wanted a common currency, but they were not ready to give up their sovereignty. So they came up with a compromise. They figured that if European governments could converge sufficiently in their style of budgeting, they could do without a central budgetary authority. Their plan for common-currency membership rested on an independent central bank and three regulatory pillars: First, no bailouts (as stipulated in article 125 of the Maastricht Treaty). Second, no "monetization of debts"-that is, printing money to pay off creditors (article 123). Third, no crazy budget deficits (as laid out in the so-called Stability and Growth Pact, which limited them to 3 percent). There was a logical problem with this structure. As the French economist Charles Wyplosz pointed out recently, if the no-bailout clause were really credible, then there would be no need for the Stability Pact, since countries that ran excessive deficits would be disciplined by markets. But Europeans lacked the discipline even for the Stability Pact. Greece cooked its books to conform with it. Italy was given a waiver on its total-debt provisions, and Prime Minister Romano Prodi called it a "Stupidity Pact." France and Germany flouted it. And last spring, European authorities both bailed out Greece and (despite some accounting trickery to disguise the fact) monetized its debt.

The architecture of the euro had other elements. Most monetary unions-consider our dollar-have automatic transfers that smooth imbalances when one region of a currency area is booming and another is slumping. If California is stagnant, its residents collect more in unemployment benefits and pay less in taxes. If Texas is getting rich, tax revenues go up and welfare expenditures go down. But as the Harvard economists Alberto Alesina and Edward Glaeser have shown, people are reluctant to pay taxes to help out those with whom they don't feel they have much in common. Just as a lot of suburban Americans saw the black, inner-city poor as "welfare queens" in the 1970s and 1980s, frugal Germans fear that their savings will be shipped to Greece to fund retirement-at-50 for a bunch of mafiosi.

We will probably see a spate of articles that try to answer the question "What happens to Europe with no Euro?" The common market isn't going anywhere so it probably won't change that much, except perhaps to make European nations more nationalistic in their trade practices.

And the European Union isn't going anywhere either so expect the same kind of socialist nonsense being handed down from the EU parliament that it has already been dispensing. But they will have less influence than before, which can only be a boon to countries like Great Britain, France, and Germany whose economies suffered under the stifling rules of the Euro.



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