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Minor quibble on John's euro comments

Good to see our author again bending over the grindstone.

I do have a quibble about the statement that (in effect) changes in currency valuation were pre-euro available to paper over differences in the performance of national economies. This was only really the case in the immediate aftermath of the death of Bretton Woods. Prior to that, currencies were fixed via the gold price, and the exchange rate was subject to the caprice of the national government, which merely enforced a devaluation when they ran up unmanageable debts. Even post-1974 the EU had various schemes for fixing currency values, most of which operated successfully for some period of time then fell apart. Incidentally, the Irish Pound only decoupled from Sterling (after decades of effective monetary union) to join one such mechanism.

The whole thing was enforced with capital controls (some will remember the days when you could only take £50 out of the UK, and even I can remember not too long ago that all international transfers had to go through the Bank of England). Of course depreciation of your debtor's currency (which is what those advocating that Greece and possibly others should leave the euro want to see) is little comfort to those holding that country's debts - I doubt anyone cares whether they get 0.5 euros for each euro Greece owes them, or 1 New Drachma, worth 0.5 euro.

The current mess illustrates, if anything, how weak the EU is, with the troubled countries being effectively held to ransom far more by German domestic politics than EU mandarins. In reality both sides need to compromise if they want to hold it together, and ultimately private creditors need to step up and take the hit, just as they have to when domestic debts go bad.

I'd also question (as a German resident) that Germany is suffering from an undervalued currency. The economy is definitely happy to have the currency pulled down by Greece and others. It's a political question whether we're prepared to pay cash to keep Greece in (and hence the value of the euro down), or are happy to see them leave (or even leave ourselves) and pay a similar price in a different way.

Re: Minor quibble on John's euro comments

While the strength of the German economy has been influential in holding up the value of the Euro, to what extent is the Germany economy being dragged down?
If Germany had retained the mark, what value would be placed on their economy today and where would the Euro be?
At what point will Germany want to escape the Euro itself? or maybe have a two stream Euro?

Re: Minor quibble on John's euro comments

The argument is that the German economy is being stimulated by having an undervalued currency and that the peripheral economies are being depressed by having an overvalued currency.

The argument might have some merit - certainly the current and previous British prime ministers seem to think that devaluing sterling was an economic stimulus for the UK. The trouble is this doesn't take long to feed through to inflation, and the time in which you can take advantage of suddenly-cheaper everything is very restricted. The idea that Greece et al.'s problems are to be blamed on the euro is also only partly true (and not in the way most people think it is) - nothing to do with relative (and now inflexible) exchange rates, but rather to do with the impression of creditworthiness the euro gave to those governments. That is now shot and to the extent people ever learn anything, Greece will get its bailout this time, but will not get a second one if it sins again.

Do remember we had effectively globally fixed exchange rates for the entirety of human history until 1974. It's the floating currencies that are the experiment (still ongoing), not the fixed ones. Ironically, if Bretton Woods hadn't been dismantled the Euro would probably never have been conceived.