June 28, 2012
the end of the euro
Most of the current policy discussion concerning the euro area is about austerity. Some people – particularly in German government circles – are pushing for tighter fiscal policies in troubled countries (i.e., higher taxes and lower government spending). Others – including in the new French government — are more inclined to push for a more expansive fiscal policy where possible and to resist fiscal contraction elsewhere. The recently concluded G20 summit is being interpreted as shifting the balance away from the “austerity now” group, at least to some extent. But both sides of this debate are missing the important issue. As a result, the euro area continues its slide towards deeper crisis and likely eventual disruptive break-up. The underlying problem in the euro area is the exchange rate system itself – the fact that these European countries locked themselves into an initial exchange rate, i.e., the relative price of their currencies, and promised to never change that exchange rate. This amounted to a very big bet that their economies would converge in productivity – that the Greeks (and others in what we now call the “periphery”) would in effect become more like the Germans.more from Simon Johnson at The Baseline Scenario here.
Posted by Morgan Meis at 06:59 AM | Permalink