5 thoughts on “False claims about the Eurozone from the Brexit camp”

  1. Posted 01/03/2016 at 20:13 | Permalink

    First up, thanks for the article. It is important for people to understand that economic problems in, for example, the Southern European countries did not begin with the Euro and cannot be fully explained by it. However, I would query one point, you say the following:

    “The one outlier in the discussion is Greece, where it does appear that euro exit could ease economic recovery. That is not because of any inherent flaw in the euro, but rather because the degree of internal price devaluation needed for Greece to recover has proved hard to achieve so far, given the rigidity of product and labour markets and large share of the state in GDP.”

    You state that Greece could be aided by leaving the Euro, and speak about devaluation, and simultaneously state that there is no “inherent flaw in the euro”. There is a massive inherent flaw in the structure of the Euro, the attempt to unite monetary policy across very different economies without fiscal union. It is certainly true that Greece et al had problems before the Euro, but it is disingenuous to imply that the Euro has absolutely nothing to do with the current situation. Monetary union across diverging economies without fiscal union can only lead to significant problems.

    Also, it should be noted that the adoption of the Euro by, for example, Greece, facilitated further Greek borrowing because they had an artificially lowered interest rate on borrowing from adopting the Euro. Lenders assumed that Greece was, in effect, backstopped by Germany. However, Germany has proven unwilling to take the necessary steps towards fiscal union, meaning that the only path for Greece has been major rapid austerity measures.

    In other words, I’m saying that there are many factors in the economic malaise in Southern European countries like Greece, factors that include byzantine labour regulations etc. However, the Euro is part of that story, it is one of the factors. It is right to inform people of other factors, but entirely disingenuous to imply that the Euro is some tiny, small, insignificant factor – when it, in fact, is a significant factor – along with others.

  2. Posted 01/03/2016 at 23:55 | Permalink

    So, assuming everything you’ve said there is correct. The Eurozone has done nothing to make things better?

  3. Posted 02/03/2016 at 11:52 | Permalink

    Actonian – Thanks for the comment. My view regarding Greece, and indeed the whole structure of the euro, differs from yours. Greece entered the euro with an overvalued exchange rate. It also lied about the state of its public accounts. This was then followed by a borrowing splurge by a state which has a much bigger role in the economy than any other euro member. Of course, it was the banks’ mistake to lend at such low rates to what was historically an unreliable borrower. But when trouble hit, Greece should have been allowed to default in line with Stability and Growth Pact rules, and also in line with what other currency unions (such as Switzerland) have done when a region had an unsustainable fiscal balance. I tend to think that the whole fiscal union argument is a red herring – we have been led to assume it is a sine qua non of working currency unions, but it isn’t.

    So, in a way, you are right that Greece’s inability to recover has something to do with its adoption of the euro, but the structural problems themselves are the result of deliberate domestic policy choices, domestic regulation and the lack of a free and functioning economy. All of these are not related to the single currency.

  4. Posted 02/03/2016 at 11:59 | Permalink

    Diego, you are right to point to the structural problems of Spain and Italy. There is a nice piece on Italy’s problems in the October 2015 issue of Economic Affairs which brings this out.
    I’m not a fan of the euro, though!

    PS it’s ‘free rein’ not ‘free reign’.

  5. Posted 05/03/2016 at 20:10 | Permalink

    The major problem with the euro is how it has facilitated the accumulation of debt that never gets (and never can be) paid off. I recommend Philip Bagus’ book ‘The Tragedy of the Euro’ for more on that.

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