There is much to dislike in the former IMF chief economists Peter Boone and Simon Johnson’s prognosis The European Crisis Deepens about the prospects for the Eurozone, particularly one of the three parts of their recommended solution being much deeper austerity for the next 10 years in countries like Ireland. Their assessment is inevitably a right-wing one (for example, there is no mentioned of the need for investment or increasing tax on corporations or those higher incomes) but still I think its worth reading if only to reinforce the understanding that creating the Euro in the first place was a very bad idea – one driven, as John Ross has shown, by the needs of economies that due to the scale of modern production needed a fixed exchange rate area right across their main market.
Boone and Johnson’s analysis also bolsters John’s original argument that a fixed exchange rate across vastly different economies simply will not work. However, at the moment this failure is being paid for by ordinary people. It’s also worth bearing in mind while reading the following quote an earlier point made in a section called Economics of Austerity May Fail.
Few nations sought popular support to create the euro. The German leadership avoided a referendum, and in France the Maastricht treaty was passed with a thin majority of 51 percent. Marine Le Pen, who is third in opinion polls for the spring 2012 French presidential election, is calling for France to leave the euro area and reintroduce the franc. Even though most European leaders are highly committed to maintaining this dream, no one can be sure what the costs are in order to keep it.
A plausible negative scenario is that those costs, in the eyes of the electorate, eventually appear too high. The evidence to date suggests Europe’s periphery, even in a fairly benign outcome, will be condemned to many years or even a decade of tough austerity, high unemployment, and little hope
for future growth.
However, for the moment, when asked, the majority of people in Europe want to the Euro to stay, fearing what might happen if it were to collapse. However……
There is no doubt that European political leaders are highly committed to keeping the euro area together, and so far, there is widespread support from business leaders and the population
to maintain it. There is also, rightly, great fear that disorderly collapse of the euro area would impose untold costs on the global economy. All these factors suggest the euro area will hold
However, many financial collapses started this way. A far more dramatic creation and collapse was the downfall of the ruble zone when the Soviet Union collapsed in 1991.
Argentina’s attempt to peg its currency to the dollar in the 1990s was initially highly successful but ended when its politicians and society could not make the adjustments needed to hold the structure together. The Baltic nations—Estonia, Latvia, and Lithuania—have managed to maintain their pegs
but only after dramatic wage adjustments and recessions.
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