The International Monetary Fund (IMF) has warned of storm clouds gathering over the global economy. The threat of a US-China trade war, the risk of a ‘no deal’ Brexit, and the febrile state of international politics have IMF economists concerned. In Europe, the latest industrial activity numbers from Germany have raised fears that the biggest economy in the EU might be heading for recession. Meanwhile, the European Central Bank (ECB) has withdrawn the prop of quantitative easing. Have the various structural problems and contradictions of the Euro been patched up since the Eurozone crisis? Or, if the global economy stutters, could troubles with the Single Currency flare up again?

What do our readers think? One of our commenters, Bob, sent us a comment arguing that European economies are too different for the Euro to work. He argues: “A normal economy that is unhealthy would decrease the value of their currency to match their economic position. But due to the fact that the Euro is a currency used by almost all EU member states, the currency’s value is dependent on all economies and can’t be devalued. The artificial process of quantitative easing is what keeps the currency stable.”

To get a response, we put Bob’s comment to Tim Worstall, blogger, freelance journalist, and Fellow at the free market neoliberal Adam Smith Institute. How would he respond?

This is true but sadly it’s even worse. A single currency means, by definition, a single monetary policy. The various eurozone economies are indeed different, they react to external stimuli differently. This is all covered in the idea of “optimal currency areas” and the eurozone isn’t one.

For example, Germany has largely fixed rate mortgages, the UK largely floating rate. So, a change in interest rates affects all UK mortgages immediately, it only affects German ones as they are newly taken out. The British economy is thus much more sensitive to a change in interest rates than the German – this is one of the reasons Gordon Brown gave for not joining the euro. It’s this difference which triggered the Irish and Spanish property booms – Germany needed low interest rates around the introduction of the euro, those two countries definitely didn’t. From that non-optimality of the currency area came the later collapse in those two countries.

To get another perspective, we put the same comment to Jeromin Zettelmeyer, Senior Fellow at the Peterson Institute for International Economics and former director-general for economic policy at the German Federal Ministry for Economic Affairs and Energy. What would he say to Bob?

I think Bob has a point. So, when countries form a currency union, they lose a degree of flexibility to deal with those differences, that is definitely true. Now, the question is whether that more than offsets the advantages of being in a currency union; having the same currency is good for trade, and also by being in a currency union the various members benefit from a high quality institution, which is the European Central Bank, which has credibility and will, over time, achieve lower real interest rates than most members would have had on their own, making the environment more growth-friendly.

Nonethless, Bob’s point is well taken. So, in order to deal with these differences that would generally have resulted in exchange rate movements, you need a fair amount of flexibility within the currency union. So, flexibility of the real economy, which requires wage and price changes, and it also requires fiscal policies at the national level that can ensure that discrepancies between the business cycles of various countries that would typically be dealt with by national central banks are dealt with by fiscal policy. And, we’ve had problems with both in the Euro area, and part of the Euro area reform project is about addressing those problems; in particular, and here views differ, either by restoring the ability of national fiscal policies to deal with these differences across countries (so there’s a conservative agenda which says what countries should be doing is regaining fiscal space so they can do this; everyone for themselves), or they by creating some kind of fiscal mechanism that can transfer resources from the stronger to the weaker countries at times of stress, and then vice-versa when the other countries are in stress, so it need not be a permanent transfer…

We also had a comment from Protesilaos who says an orderly exit from the Single Currency is not possible. He argues that the first country that opts out will “trigger a chain reaction in the banking sector… which will see private banks and other corporations falling one after the other just like [dominoes]. Moreover, the markets will begin to speculate over which will be the next country to exit, there will therefore be immense speculative pressures which will eventually drive more countries out until the point where the currency union collapses, leaving behind chaos…”

How would Tim Worstall respond?

Yes, exit will be very difficult. Not impossible, just very painful. Greece should certainly have left as the banking system was already bust and the pain already caused. If Athens had done what Iceland did – default on the debt, devalue the new drachma – then the pain wouldn’t have been much worse than it was. But the crisis would be over and well into the past now – as it is in Iceland.

And how would Jeromin Zettelmeyer respond to the same comment?

Yes, I basically agree with Protesilaos. So, if any country left that would trigger tremendous stress, both for that country itself and for other members that would be viewed as possibly being candidates for leaving themselves, perhaps for similar reasons. So, it is a very daunting and dangerous thing to contemplate the Euro breaking up. That said, if it ever happened obviously there would be a policy reaction that would try to minimise the damage. Nevertheless, it’s completely uncharted territory and, in my view, something that should not happen. So, essentially, I agree with Protesilaos.

Should we give up on the Euro? Is it even possible to scrap the Single Currency, or would the economic impact be too painful? Let us know your thoughts and comments in the form below and we’ll take them to policymakers and experts for their reactions!

IMAGE CREDITS: (c) BigStock – ilolab; PORTRAIT CREDITS: Jeromin Zettelmeyer (c) Peterson Institute for International Economics

36 comments Post a commentcomment

What do YOU think?

  1. avatar

    The benefits of having a common currency is much more than the negative ones. And lower interest rates that euro has, are not so bad even for a weaker economy. You don’t need high interest rates to achieve growth.

  2. avatar

    We need Euro and we need a stronger, more united European Union. We need to step forward to United States of Europe.

    • avatar

      Can’ U see what a “ stronger,closer EU” have caused?!

    • avatar

      We don’t need the Euro and we don’t need a stronger and more united Union. We don’t need to step forward to United States of Europe

  3. avatar

    Giving up the euro would be a headache again. However the EU should look at QE for the people instead of giving it to the financial sector. Boost the economy not the financiers.

  4. avatar

    Either major fiscal/political changes are made..or it will ultimatly collapse…it doesnt appear that germany is prepared to accommodate banking/fiscal union..debt mutualisation….so the only alternative is a break up of the existing monetary union…it is inconcievable that the non german block should accept another 20 years of penury.

  5. avatar

    The Euro became a trap for many countries. The Euro, at least in its design, was a completely disaster. To have 19 countries sharing the same currency policy, but with so different tax policies and realities was a suicide for many countries. Now, it is virtually impossible to ditch it, which drives me to think that it was designed just to help the German businesses and to trap the rest of countries in the EU.

  6. avatar

    Its not a game to play, now you see it now you don’t. The relevant bodies should sit down carefully and strengthen the framework of the euro.

  7. avatar

    Europe is just a word that unites a race not the mind and pocket.

  8. avatar

    Truth is that in poorer EU countries where the euro has been introduced, prices have risen sharply. In Lithuania, the litas/euro ratio was 3, 45. In some cases an item now costs approximately the same in euro units as it did in national currency units. Indeed, to think that an article of clothing that cost 60-80 LTL is now 60-80 EUR. It’s ridiculous. That said, I don’t think getting rid of the euro now is a valid option. Can’t even imagine the economic chaos that would follow.

    • avatar

      I visited one month after the euro kicked in and, like in Portugal, all the prices had notoriously been prepared for the euro – despite the price freezing period.
      Prices were still displayed in both currencies and Macdonald’s was the only place with a “round” price in litas. All the other places had that in the euros, when conversion rate was not that round.

  9. avatar

    Yes bc the ECB, like the FED, only serves the rich and powerful

  10. avatar

    Yes, the euro project is a failure.

  11. avatar

    Euro is a good move for Europe against dollars. I imagine without how bad can be

  12. avatar

    Monetary union was a disaster for the periphery of Europe. I think E.U. is unsustainable with the current form.

  13. avatar

    No. We should move to a political union which is what it requires a monetary union.
    And then, move out from NATO.

  14. avatar

    no way
    the only thing still unifying EU

  15. avatar

    Unless we get rid of the money altogether, no.

  16. avatar

    And then adopt Russian Rubel and then accept joining under Russia control and then adopt Russian language
    What’s wrong with this page

  17. avatar

    If collective security is a traditional wisdom which has secured Europe and world peace for 70 years, under the same principle, a united European currency is the only way to secure national currency of all members. The myth of freedom and liberty which seeks to disintegrate Europe and abandon Euro would only speed up the decline of Europe and small states would not be able to stand the turbulence generated by the current global political economy when the single military superpower has become the world’s largest debtor country, while China is emerging as the second largest economy and is fast catching up. It is not difficult to choose whether to follow a falling hegemon and warmanger or doing business with the world’s second largest economy which has been trying to avoid fighting a war. Traditional European wisdom is that closer economic integration would make war not an option for the opportunity cost is too large. Traditional American wisdom is that divide and rule and American first. It is not difficult for any rational and reasonable European to choose.

  18. avatar

    In a global system the interconnectedness of all people and states has grown a global community of fate, in which people are like sailing on the same boat. Collective efforts are required to overcome all issues that have transcended the imagined boundary of nation, among which are all issues generated by the political economy, environmental issue, war and peace issue, etc. The globalization of financial force with daily transaction of over trillions of money is larger than the economic size of many small states including those small and advanced economies in Europe. It is only crazy old fool like Trump and his old comrades, who are still living in the Cold War of the last century, would return to isolationism and protectionism for the security of its own country and making the American great again.

  19. avatar

    Should the US give up the Dollar?

    But actually I don’t see the point in having referenda on currency introduction like in Sweden etc. Maintaining a responsible Money Policy should not be founded on simple Brexit-like yes or no decisions. That turns out to be bad especially for people already in economic trouble. I think every non-Euro Central Bank should be given the responsibility to introduce the Euro when it judges to be the right time for its national economy.

  20. avatar

    How can small states of Europe survive the turbulence of the global financial force dominated by multinational financial institutes of the US? If euro does not exist, Europe has to submit to order of Trump, stop buying Iran oil, buy only US oil. As we have already seen, China is buying Iran oil with renminbi, hence, the US cannot control China trade. The US is obliged to “grant” exemption to China, while EU, being the faithful ally and is still buying Iran oil with US dollar, EU is on the sanction list. EU, an “ally” of the US, appears more like a subordinate and lost of sovereignty too.

  21. avatar
    bert van santen

    YESSS! Without the one size fits none coin, the European countries are able to devaluate again if needed.
    The largest monetair mistake of the past century

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