Tuesday, November 8, 2011

Why the Euro is a good thing

I have been, for a long time, derisive of the European experiment. Though it made it easier to travel through Europe without changing money every 23 minutes, the Euro deprived nations of their most sovereign of tools: monetary policy. Today I had a change of heart.

It was long argued that having fiscal policy without monetary policy is akin to showing up to a gun fight with a knife. Unable to control the value of their currency vis-à-vis their trading partners, nations will be deprived of the most fundamental tool for managing their economies.

It’s almost like returning to the gold standard!

Come to think of it, why is that a bad thing? The gold standard forced the fiscal polity to behave: they couldn’t borrow endlessly then inflate their way out of trouble. They couldn’t manipulate their currency to gain advantage in the international market.

Ok, so you couldn’t control the liquidity either, and that put a crimp on growth in certain cases.

But the Euro doesn’t suffer from that defect. In fact, and assuming a truly independent ECB that focuses on sound currency as their only goal, the Euro has all the good attributes of the gold standard and non of the bad.

Euro is in trouble because Greece, Italy et al cheated and the present drive to save the Euro by bailing out these states is a misguided effort that will create the exact kind of moral hazard the Euro was designed to avert.

I say let Greece fail and let them leave the Euro zone. This will send an unmistakable message to all European capitals that they need to manage fiscal policy lest they end up like Greece.

A transnational currency exogenously controlled might be the only governor to a democracy’s tendencies to profligate.