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Nosemonkey's EUtopia

In search of a European identity

Free markets, the euro and currency competition

Following on from the last quick post on the near-inevitable failure of a post-euro Drachma, another interesting spot: Eurozone breakup and the doctrine of competing currencies. Also worth reading in full – not sure if I entirely agree, but any advocates of scrapping the euro (because devaluation’s like, great, yeah?) need to be able to answer these arguments, especially about the logic of their position:

“For if their assertion of competing [National Central Banks] were correct, then it could also be deduced that any kind of ‘national competition’ is beneficial, which understandably leads down the perilous path of protectionism, mercantilism and state omnipotence…

“They uphold that national currencies will somehow restrain government spending since profligate politicians will no longer be able to borrow cheaply, something that they could do during the pre-crisis years of the euro. This implies therefore the absurd position that ‘profligacy’ was born with the euro and is deeply embedded in it; whereas all hitherto governments were prudent in their spending when they had their national currencies in place. Such a multi-illegitimate conclusion derives from the observation that interest rates in the eurozone converged and countries like Greece could borrow at rates that only Germany could enjoy before.

“Though the convergence in interest rates is correct, this view is… confusing correlation with causality…

“Moreover one only has to look at the fiscal position of governments prior to the euro era, or to check the current level of government spending and money easing in countries like the US or the UK, to realize that the argument of mystically restrained states by money they create out of thin air, is inconsistent with reality. This assumption effectively casts to the wind all economic knowledge on the subject.

“The bottom line is that under the given circumstances in the eurozone’s political economy, the only realistic/feasible option, even from a Hayekian, free market perspective is the preservation and improvement of the euro.”

One Comment

  1. “For if their assertion of competing [National Central Banks] were correct, then it could also be deduced that any kind of ‘national competition’ is beneficial,”

    But that isn’t actually what we say. He’s attacking a straw man.

    What we do say is that the necessary repricing, once an asymmetric shock has hit an economic area, is easier with floating currencies than it is through internal devaluation.

    As, you know, the fall in the £ against the DM was rather easier 20 years ago than the severe recession necessary to get the internal devaluation going?