The two sensible choices

There are two sensible and realistic choices for solving the Euro crisis. The sensible and realistic choices are:

  • Surplus areas like Germany give deficit areas like Greece free money, indefinitely, or,
  • Weak economies like Greece and Spain leave the Eurozone.

These really are the sensible and realistic choices. You need one of these if you want roughly equal purchasing power across the Eurozone. Otherwise, money will flow from unproductive deficit areas to productive surplus areas, people in surplus countries will get steadily richer, people in deficit countries will get continually poorer, and eventually this will come to a head by revolt or other radical means.

Free money recycles this flow, exchange rates stop it. Economically the first is better because more flow of goods and services and money turns the economy forward and makes everyone consume more in aggregate. The latter choice aims for fairness, sacrificing total volume of trade and industry in the process.

Right now we’re still discussing the free money idea. Free money could be given as tax-and-transfer grants like most states do internally, as endless monetary expansion like the US, or by recurrent debt default and restructuring. The only advantage of the third option is it makes a policy look like an accident.

If free money won’t fly, leaving the Eurozone is the choice. Greece should have left the Eurozone… any time from 2001 till tonight would be good. Cynics would say stay until 2011 while the free money vision of Europe looked ascendant, but certainly Greece should have dropped after that. Greece should leave now.

Dropping out of the currency union has only advantages for the weaker economy. The disadvantages for the stronger economy are that it stops the flow of funds from the poor to the rich and removes demand for their exports. Germany selfishly wants the Euro. Greeks are stupidly attached to it because they equate the Euro with the EU and three decades of progress.

There are also a couple of totally fantastical choices that people might believe would fix the Eurozone, but they won’t work.

  • Economies like Germany and Greece become similarly productive any time soon.
  • Regions fix trade imbalances through fiscal discipline and austerity.

These are myths. It would be great if Greece was a bit more prosperous like Germany and that would take a venture investment ethos, congenial labour relations, an orientation to global markets, nourishing a boutique economy, branding, IP rights, stability and democracy. Well, at least Greece has democracy.

Different economies may become more alike, but they won’t become the same. The Mississippi delta is less productive than Silicon Valley and that’s why the meagre social policies of the US transfer funds indefinitely from rich Californians to poor Louisianan’s. Convergence doesn’t remove the need for transfers, it makes them smaller.

As for austerity, austerity is the null policy. Austerity means to just accept the dynamic of unproductive regions being steadily poorer and productive regions being steadily richer without asking for free money to mitigate it. And fiscal discipline means don’t try the free money by monetary expansion or default routes.

Until 2011 it looked like Europe was going to work like a superstate using free money transfers. This would have been better for all, including Germans. This idea now looks dead. Weak economies should ditch the Eurozone, now.

2 thoughts on “The two sensible choices

  1. Pavlos,

    I have just discovered your blog by finding your link on Matt’s blog.
    This first article that I have read makes such sense – this is my line of thinking as well.
    I intend to read the rest of your stuff when I have more time.

    I had a really good laugh when I saw your diagram of where you stand in the political spectrum. I am certainly glad to see that you are closer to Chomsky than Bush, otherwise you wouldn’t have heard from me again!

    Some years back, I “discovered” Yanis Varoufakis and I have been an avid follower of his ever since. When Yanis entered into politics at the beginning of this year, this subsequently led me to follow the unfolding story of Syriza’s rise to glory after they won the elections, until the point where we are today. So I have had an amateur’s crash-course in Economics & EU politics.

    I have just started on this blogging thing myself recently. I was “sucked into it” after posting a few comments on another blog written by Iannos Glinavos. Like you, I am doing it to add my weight (a few extra kilos around my waist every month, to my dismay) to the growing call for a new deal in Europe (a wide enough description to avoid putting myself into a small pigeonhole).
    I also find that I present my ideas with more clarity & sense when I write them down!

    I will keep an eye on your blog, going into the future, and may be tempted to reblog some of your stuff on my blog in support of some of my ideas. My rules are the same as your rules regarding this kind of thing.

    All the best
    Peter Smith

    Reply
  2. “These really are the sensible and realistic choices. You need one of these if you want roughly equal purchasing power across the Eurozone. ”

    Do we really want everybody in Europe have the same purchasing power? It was always the case that Greece was poorer than Germany when they had different currrencies. Presumably a return to the Drachma would again ensure that that difference is always there in the future. Wages at teh moment are less than half in Greece as compared to Germany.

    But I think it was an illusion anyway that purchasing power in Greece got really higher up to 2009 in the Euro. as all growth was fuelled by unsustainable debt. If that unsustainable credit boom had not been there the difference of purchasing power had remained. between Germany and Greece. the boom would had been tinier and the bust had been smaller, too.

    Unlike the USA, a high school teacher does not expect to get paid the same in Greece or Germany. In California and Lousiana, wages for teachers are probably much closer to each other.

    Also productivity levels have not have to be the same, as long as wages are different.

    So if the credit boom had not been there it would have worked out much better with the Euro.

    To keep current accounts in balance will be much more difficult, and I wil write something on my blog soon about that, because you made some good points on trade on mine and SWL mainlymacro blog.

    Reply

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s