The Euro is a mismatch between 19th century money and a 20th century economy

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11111This quote from Wolfgang Münchau’s column in the Financial Times today has received a fair bit of traction on social media:

“A few things that many of us took for granted, and that some of us believed in, ended in a single weekend. By forcing Alexis Tsipras into a humiliating defeat, Greece’s creditors have done a lot more than bring about regime change in Greece or endanger its relations with the eurozone. They have destroyed the eurozone as we know it and demolished the idea of a monetary union as a step towards a democratic political union.

In doing so they reverted to the nationalist European power struggles of the 19th and early 20th century. They demoted the eurozone into a toxic fixed exchange-rate system, with a shared single currency, run in the interests of Germany, held together by the threat of absolute destitution for those who challenge the prevailing order. The best thing that can be said of the weekend is the brutal honesty of those perpetrating this regime change.

But it was not just the brutality that stood out, nor even the total capitulation of Greece. The material shift is that Germany has formally proposed an exit mechanism. On Saturday, Wolfgang Schäuble, finance minister, insisted on a time-limited exit — a “timeout” as he called it. I have heard quite a few crazy proposals in my time, and this one is right up there. A member state pushed for the expulsion of another. This was the real coup over the weekend: regime change in the eurozone.

But what Münchau points out as a recent development within the EU, coming out of the so called ‘deal’ this weekend with the humiliated Greek government, is actually fundamental to the structure of the Eurozone and the single currency.

As John Ross pointed out in 1997 in his analysis of the proposed single currency and the strictures of the Maastricht Treaty, the current political power struggle is reflective of the fact that with the Euro a 19th century economic model was imposed on 20th (and indeed 21st) century economies:

Fundamental errors of the Maastricht Treaty

Maastricht, in essence, attempts to solve the problem of creating a single currency by grafting a 19th century monetary system, with the same rigidity in exchange rates as a gold based one, onto a 20th century economy. By irrevocably fixing the ratios between national currencies (i.e. abolishing them), adjustments between different levels of productivity, and other factors affecting costs, can no longer take place via exchange rates – this, incidentally, would occur with any attempt to introduce a single currency, and not simply under the Maastricht Treaty. The only issue is ‘what type’ of adjustments will take place in the real economy.

If there existed a 19th century productive economy, to correspond to a 19thcentury concept of exchange rates, the price system could take the strain of adjustment. Regions falling behind in productivity, for example as with the UK due to low rates of investment, would reduce their prices relative to those in other regions. In order for relative prices to fall in these regions, firms would have to accept reductions in profits, labour would accept reductions in wages etc. In reality, of course, this will not occur – because the 19th century economy no longer exists. Firms engaged in imperfect competition/monopoly will respond, just as textbooks de scribe, and as the history of the 20th century demonstrates, not by reducing prices but by reducing output. Labour will not react with favour to reductions in wages. Recessions will multiply, regional imbalances will intensify, racism and xenophobia will spread, the trade unions will be attacked to attempt to reduce wages, the welfare system will be eroded to drive down costs, crime will soar as unemployment rises etc. The experience of the UK re-joining the gold standard, or of its ERM membership, will be repeated on a European scale.

All the phenomena, in short, experienced with the move to implement the Treaty of Maastricht will intensify to a qualitatively higher level. The mismatch between 19th century money and a 20th century economy, while an interesting ‘theoretical’ experiment, will be most unfunny to witness in practice.” 

But the events of the weekend confirmed, that despite the repeated depoliticizing attempt to shroud discussion of the issues in technocratic detail, this was never about making a ‘serious’ economic argument. As Greece’s ex-Finance Minister Yanis Varoufakis points out in the revealing New Statesman interview today:

It’s not that [my arguments] didn’t go down well – it’s that there was point blank refusal to engage in economic arguments. Point blank. … You put forward an argument that you’ve really worked on – to make sure it’s logically coherent – and you’re just faced with blank stares. It is as if you haven’t spoken. What you say is independent of what they say. You might as well have sung the Swedish national anthem – you’d have got the same reply. And that’s startling, for somebody who’s used to academic debate. … The other side always engages. Well there was no engagement at all. It was not even annoyance, it was as if one had not spoken.