6 thoughts on “The Euro And The Vote

  1. All you offer is diagnosis, a bad one at that. What would be to discuss?
    From personal experience in Berlin, I can tell you that the price of D?ner Kebap has fallen to 1€ in some places. That’s cheaper than in 1990.
    And it was a good one.
    What would you suggest? Actually scrapping the Euro would seem very risky to me.

  2. Hmm. Tend to agree myself. Euro is only really holding up because it is a ‘less bad’ dog of a currency than the dollar.

  3. Am I wrong or is there an underlying assumption to this post: that the European economy or economies are just corks bobbing in the sea of U. S. and Chinese economic policy? If that’s so it’s by design. Adopt pro-growth policies. That this has not been done is self-evident.

    The problem I see is that Europeans like the way things are just fine. So how about a little less carping about how the mean, bad men overseas are behaving? If you don’t like it, change what you’re doing. If you do like it, why complain?

    It all reminds me of Onslow on the Britcom Keeping Up Appearances who “could have made something of himself if he hadn’t been bone idle.”

  4. “The problem I see is that Europeans like the way things are just fine.”

    If there was a consensus on this, Dave, we wouldn’t be facing the possibility of an agreed community initiative being overturned next weekend. We are not all in agreement.

    Nothing strange about this: in the US some people are pro Bush and some anti. That means some people like the way the US is moving and others don’t. With Europeans it is the same. Some of us favour globalisation and more trade with China, India and Brazil, others don’t. (And that, Oliver, is one of the things which there is to discuss).

    You are right Dave: there is an underlying assumption: that the global economy is seriously out of balance, and that the continuance of these imbalances puts at risk the stability and growth of the entire global structure on which we *all* depend.

    “that the European economy or economies are just corks bobbing in the sea of U. S. and Chinese economic policy?”

    I think this is a rather exaggerated version of what I am trying to say. I am certainly saying that (for what for me are basically demographic reasons) Europe and Japan have ceased to be what are often called ‘global growth engines’.

    Basically Germany and Japan are driven by exports, and in this sense highly dependent on investment growth in China, and Chinese investment is dependent on the appetite of the US consumer for accumulating debt, since the biggest end customer is the US.

    “Adopt pro-growth policies”. I’d love to know what you think these are. I don’t think that it is self-evident that these haven’t been tried: monetary policy has been incredibly loose, and fiscal deficits have been general and extended.

    But none of this is the direct issue of my post.

    I am saying that a lower euro on the face of it would be good for Europe (I am not saying, Oliver, scrap the euro. I am a pragmatist. I wouldn’t have set the euro up, but once we have it we have to try to live with it. I do point to all the problems, since I think people should be aware of what they are getting into. If the ECB has to lower rates later in the year, as I am saying it probably will have to, this will be a *hard* decision as there will be winners and losers. Also I don’t know if the euro, long term, can survive: but to find out the answer we are all condemned to wait and see).

    However, the lower euro, whilst offering temporary relief to Europe, only complicates matters elsewhere: namely in the US. I was posting earlier in the week about the danger of deflation in Europe as and when we get into the next recession (maybe we are already there, but maybe not, we need still to wait on this front).

    If the euro/USD exchange rate shifts markedly in favour of the dollar, this will simply export the deflation across the Atlantic. Not much we can do about this, there is no policy proposal behind this point, just that we need to be aware, and that all of this will have implications for the freedom of movement of the Federal reserve.

    “So how about a little less carping about how the mean, bad men overseas are behaving?”

    Where am I doing this Dave, could you please show me?

    Oliver generally: I take the point about the kebab. I assume you are suggesting that there is already considerable evidence of price deflation in some sectors: fine. The problem would come if this were extended across an entire economy. Inflation readings then become minus numbers, and since there is an effective limit to interest rates at zero, you can’t get negative interest rates, so monetary policy becomes effectively dead.

    “All you offer is diagnosis, a bad one at that”

    Seriously though Oliver, I agree that I am strong on diagnosis, and weaker on solutions. But this is a blog after all. I haven’t got all the answers in my back pocket.

    Economics Bloggers Nouriel Roubini and Brad Sester have a paper entitled:

    “Will the Bretton Woods 2 Regime Unravel Soon? The Risk of a Hard Landing in 2005-2006.”


    This paper addresses some of the issues, and I would go along with much of what they argue.

    In the abstract they state:

    “This paper argues that the current renminbi-dollar standard is not stable: the scale of the financing required to sustain US current account deficits is increasing faster than the willingness of the world?s central banks to continue to build up their dollar reserves. In the first section of the paper, we highlight the fundamental reasons why the Bretton Woods 2 international monetary system is unstable. In the second section, we argue that there is a meaningful risk the Bretton Woods 2 system will unravel before the end of 2006.”

    The Central issue isn’t the Euro, it is Bretton Woods 2, and the whole idea of a reserve currency in a global economy running long term imbalances. The Euro just complicates an already complicated situation.

    I’m sure this doesn’t resolve your issues Oliver, and I don’t think pushing for international financial reform will help us very much in deciding what to do next week. In the case of Germany I am arguing for a further loosening of monetary policy – but since I am not a monetarist, I don’t imagine that this will simply do the trick, since it is the appetite to borrow you need to influence: you can take a horse to water, but you can’t make it drink. I am arguing for the Lisbon agenda, labour market and welfare reform, not because I’m against a social model – again I’m a pragmatist – but because you simply can’t continue with these levels and create employment.

    Hans Werner Sinn’s suggestion of an effective negative income tax for those entering the labour market at a much lower minimum wage might help.

    And I am arguing for a positive immigration policy, and a change in attitude towards economic migrants generally. I don’t know if that is specific enough.

  5. Think about reserve currencies the way Churchill did about forms of government, and you know how to put Edward?s anti-Euro attitude into perspective. If he had had to write about the U.S. during the Great Depression, he would have had no positive ideas about the future whatsoever.
    (Yes, this is a secular deflationary depression – masked only by massive deficit spending -, and Japan and Germany have been going through it for a much longer time than the U.S., which has spent far more fiscal ammunition right after 2001. They will also emerge earlier than the U.S. – if they don?t try a zero-deficit scheme anytime soon, that is.

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