Friday, July 17, 2015

The Greece Crisis and Monetary Unions

There has been a lot written and debated but I wanted to highlight some of the predictions about the European Monetary Union.

Source: Bloomberg http://www.bloomberg.com/news/articles/2015-07-15/nine-people-who-saw-the-greek-crisis-coming-years-before-everyone-else-did

Arnulf Baring
The German political scientist offered dire predictions in his 1997 book Scheitert Deutschland? Here's an English translation:
They will say that we are subsidizing scroungers, lounging in cafés on the Mediterranean beaches. Monetary union, in the end, will result in a gigantic blackmailing operation. When we Germans demand monetary discipline, other countries will blame their financial woes on that same discipline, and by extension, on us. More, they will perceive us as a kind of economic policeman. We risk once again becoming the most hated in Europe. 

And that is EXACTLY what has happened. The Germans are being blamed for demanding monetary (& fiscal) discipline on countries that are Mediterranean (Portugal, Spain, Italy and Greece except Ireland) with the reputation of their citizens as being lazy, unmotivated and/or early pensioners hanging around in cafes.

Milton Friedman
In a keynote address with the Bank of Canada in 2000, the Nobel laureate offered some cautious words when asked about the future of the euro. 
I think the euro is in its honeymoon phase. I hope it succeeds, but I have very low expectations for it. I think that differences are going to accumulate among the various countries and that non-synchronous shocks are going to affect them.
Was he right or was he right?
Margaret Thatcher
According to her autobiography, back in 1990 the former Prime Minister of the United Kingdom warned that the single currency could not accommodate stronger and weaker economies. Here she is describing arguments with John Major about the topic:
We had arguments which might persuade both the Germans — who would be worried about the weakening of anti-inflation policies — and the poorer countries — who must be told that they would not be bailed out of the consequences of a single currency, which would therefore devastate their inefficient economies.
The Brits need to build a statue to her and place it next to Nelson's Column in Trafalgar Square!


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Andrew Maina said...

Let me begin by confessing I was one of those who bought into the idea Syriza was pushing, when they initially got into government, that they could work out a deal with the EU, that involved achieving fiscal discipline without the troika's ideology driven austerity package.

I was wrong believing that Syriza were actually capable of pulling it off. As far as I can tell, now that the 'reform' package is being implemented anyway with ridiculous items like 23% VAT on private school tuition fees, the Greeks are stuck in a vicious cycle of austerity leading to contraction leading to more austerity and so on.

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