Why couldn't euro have been set up without fiscal controls?

[Arbu]

There was little thought put into the euro because it's not an economic thing, it's a political thing.

I doubt that very much. The EU employs thousands of bureaucrats with qualifications coming out of their ears. These people believe that complicated plans can achieve everything.

It seems to me that too much thought was put into the euro. Without any fiscal constraints Greece might have hit trade deficit problems and that would have been bad for the euro. But nothing like as bad as what is happening now. What has happened instead is that banks and Western European governments have placed their faith in the fiscal responsibility that Greece signed up to when entering the euro, and so lent Greece billions. In a looser union they wouldn't have done so. Now we have a situation like if you owe the bank a million you're in trouble, if you owe the bank a billion the bank's in trouble. Western governments and banks are so indebted to Greece that they have no hope of getting their money back. The bailouts and questions of whether or not Greece will accept further fiscal responsibility both seem to excite the markets a lot but in reality can change little - Western banks and governments have lost a whole lot of money in doing this and Greece has to accept fiscal responsibility, bailout or no bailout, because it is now effectively bust.

Why has the West African Franc lasted so long when the euro is running into such problems? I see it as being because the euro is overengineered.

 

[montmorencyt2w]

Sounds then like the problem is not so much the structure of the Euro, but simply the debt that was allowed to get out of control.

 

[montmorencyt2w]

To be sure, the German "miracle" wasn't just due to the Euro. The Germans have been objectively able to engineer competitiveness by keeping wages low.

And if it is indeed the case that they kept wages low, perhaps they were able to do this partly, by not having a house price boom (although I hear that they may be beginning to have one now, sadly. Have not looked into it in any detail though).

 

[Martinghoul]

And if it is indeed the case that they kept wages low, perhaps they were able to do this partly, by not having a house price boom (although I hear that they may be beginning to have one now, sadly. Have not looked into it in any detail though).

Nah, it was just them accepting no real wage increases for 15 years, while everyone around them was getting paid. Now, to be sure, Germany was going through the pains of re-unification then, so maybe that's why they could make such a sacrifice. However, it still remains an unprecedented feat of restraint and discipline.

 

[new_trader]

So the fiscal controls that were designed to prevent eurozone countries from running big government deficits didn't work, partly because investment banks helped governments to hide the debts they were running up. So now the plan is to introduce tighter, more supervised, fiscal controls and hope that they work.

Just more proof that central planning and fiat money always results in disaster. The Euro is perhaps the first currency in history that didn't begin as a redeemable commodity...it is pure fiat in the truest sense.

 

[Martinghoul]

Just more proof that central planning and fiat money always results in disaster. The Euro is perhaps the first currency in history that didn't begin as a redeemable commodity...it is pure fiat in the truest sense.

Huh? Regardless of the problems the Euro experiences, Greece was much worse off with the Drachma (began as a redeemable commodity a few millennia back), where there wasn't even the slightest hope of things getting better. At least with the Euro, there's a chance, however slim it might be. You're suggesting that the Greeks are better with the Drachma then?

 

[new_trader]

At least with the Euro, there's a chance, however slim it might be. You're suggesting that the Greeks are better with the Drachma then?

Huh? Now this is ironic. Surely you are the one who would think the Greeks would be better off with the Drachma. You are the one who thinks a nation having control of its money supply is a massive advantage.

Let the Greeks print and prosper aye?

C'mon Martinghoul, exlain why they would be worse off with their own currency now.

 

[new_trader]

Agreed... I think the moral of the story is that it's a good positive idea that is, really, well ahead of its time. Whenever people try to do something that's ahead of its time, even with the best of intentions, it inevitably ends in pain and suffering.

Utter nonsense...just quietly...What a great way to apologise for failure...calling it "well ahead" of its time...

I suppose all the Martinghouls of the day would have said Emperor Diocletian's economic policies failed because they were well ahead of their time.

 

[Martinghoul]

Huh? Now this is ironic. Surely you are the one who would think the Greeks would be better off with the Drachma. You are the one who thinks a nation having control of its money supply is a massive advantage.

Let the Greeks print and prosper aye?

C'mon Martinghoul, exlain why they would be worse off with their own currency now.

Well, you see, this is why I find it difficult to understand you. You're a person of slogans and absolute pronouncements. Reality, unfortunately, is complicated, which means that you can't just generalize everything.

Firstly, to paraphrase a famous author, every unhappy nation is unhappy in its own way. Greece doesn't have the political institutions necessary to make the optionality of being able to control its money supply worth the downside inherent in it. Do you remember the discussion we had on the other thread where we talked about the different tail risks? In Greece, the tail risk you end up being short with the Drachma is so significant that being long the other tail option may not be worthwhile. Secondly, Greece is already in the Euro, so you have to take into account the enormous sunk costs.

Again, my friend, devil's in the details, as usual...

 

[Martinghoul]

Utter nonsense...just quietly...What a great way to apologise for failure...calling it "well ahead" of its time...

I suppose all the Martinghouls of the day would have said Emperor Diocletian's economic policies failed because they were well ahead of their time.

Erm, I don't really see why you have such a big problem with this. Currency unions live or die mostly because of politics, rather than economics. The US dollar currency union went through a similar crisis in the past and survived, because there was political will to preserve it, i.e. the necessary political union/consensus was there. Europe is at a similar juncture and appears to lack the necessary political consensus. Thus my comment.

 

[new_trader]

The US dollar currency union went through a similar crisis in the past and survived, because there was political will to preserve it, i.e. the necessary political union/consensus was there.

Yes, and that political will was the US Constitution and namely limiting the congress' ability to create money out of thin air and specifying that only gold and silver be used as legal tender.

 

[new_trader]

Well, you see, this is why I find it difficult to understand you. You're a person of slogans and absolute pronouncements. Reality, unfortunately, is complicated, which means that you can't just generalize everything.

Firstly, to paraphrase a famous author, every unhappy nation is unhappy in its own way. Greece doesn't have the political institutions necessary to make the optionality of being able to control its money supply worth the downside inherent in it. Do you remember the discussion we had on the other thread where we talked about the different tail risks? In Greece, the tail risk you end up being short with the Drachma is so significant that being long the other tail option may not be worthwhile. Secondly, Greece is already in the Euro, so you have to take into account the enormous sunk costs.

Again, my friend, devil's in the details, as usual...

This is just waffle Martinghoul. Like you would say to me, don't paraphrase a famous author to back up your argument. Give me concrete reasons why Greece was worse off with the Drachma when you have repeatedly said that a nation having control of its own money supply is a massive advantage.

 

[barjon]

This is just waffle Martinghoul. Like you would say to me, don't paraphrase a famous author to back up your argument. Give me concrete reasons why Greece was worse off with the Drachma when you have repeatedly said that a nation having control of its own money supply is a massive advantage.

It's water under the bridge, NT. Had Greece not joined the euro it would not have been able to do the things it has done and get into the mess it's in. But, it did join and it has got in the mess.

So from here, going back to the Drachma would be massively short term damaging - maybe terminal - although in the longer term the Drachma would be so low that it would give a massive boost to their exports and to tourism etc to enable them to gradually crawl out of the hole. I dare say it's not really an option since the initial pain would cause blood on the streets.

 

[new_trader]

It's water under the bridge, NT. Had Greece not joined the euro it would not have been able to do the things it has done and get into the mess it's in. But, it did join and it has got in the mess.

So from here, going back to the Drachma would be massively short term damaging - maybe terminal - although in the longer term the Drachma would be so low that it would give a massive boost to their exports and to tourism etc to enable them to gradually crawl out of the hole. I dare say it's not really an option since the initial pain would cause blood on the streets.

Greece's problem is a debt problem because like all democratic Governments they have promised their citizens more than they can afford and expected to finance it all through the printing press. It has zero to do with optionality and what not. Like all politicians, some people think it can all be solved with political "will" and more and more central planning. Greece got into trouble when interest rates began to rise but they were 'bailed out'...the U.K and the US think the same thing won't happen to them...unfortunately they have a central bank to bail them out...it will impoverish the ignorant masses...stealthily...

 

[Martinghoul]

Yes, and that political will was the US Constitution and namely limiting the congress' ability to create money out of thin air and specifying that only gold and silver be used as legal tender.

No, it wasn't... It was the compromise between Hamilton's Federalists, on one side, and Jefferson and Madison's Democrat-Republicans on the other. Hamilton's ideas that were implemented as a result (since he was able to convince President Washington) were, more or less, precisely the opposite of what you claim. Finally, as I have mentioned a number of times, your claim regarding the US Constitution is false.

 

[Martinghoul]

This is just waffle Martinghoul. Like you would say to me, don't paraphrase a famous author to back up your argument. Give me concrete reasons why Greece was worse off with the Drachma when you have repeatedly said that a nation having control of its own money supply is a massive advantage.

I have done so already.

 

[The Leopard]

...like all democratic Governments they have promised their citizens more than they can afford...

I have to agree with this, it is a major problem facing the West, and there is simply no appetite to face up to it.

Take the current rather pitiful political brouhaha in the UK.

Liebour would have you believe that the evil UselessToryParty is making lots of cuts, thereby grinding the faces of the poor into the gutter and stifling any prospect of recovery. The UselessToryParty would have you believe that they are making cuts to spending because there is no choice and that it is the best way to get out of Liebour's mess.

Both are lies, and obvious lies. Because the simple fact is that there are no cuts. None whatsoever. In fact, the opposite is true. Both parties promote a fiction that is the opposite of the truth because it suits them, and to hell with the people they are elected to represent.

 

[Martinghoul]

Greece's problem is a debt problem because like all democratic Governments they have promised their citizens more than they can afford and expected to finance it all through the printing press.

Huh? What printing press? Didn't you just state that Greece as a member of the Eurozone doesn't have its own printing press? You really have to stop imagining a printing press around every corner 🙂.

 

[new_trader]

No, it wasn't... It was the compromise between Hamilton's Federalists, on one side, and Jefferson and Madison's Democrat-Republicans on the other. Hamilton's ideas that were implemented as a result (since he was able to convince President Washington) were, more or less, precisely the opposite of what you claim. Finally, as I have mentioned a number of times, your claim regarding the US Constitution is false.

You ought to actually read the Constitution.

 

[Martinghoul]

I have to agree with this, it is a major problem facing the West, and there is simply no appetite to face up to it.

Take the current rather pitiful political brouhaha in the UK.

Liebour would have you believe that the evil UselessToryParty is making lots of cuts, thereby grinding the faces of the poor into the gutter and stifling any prospect of recovery. The UselessToryParty would have you believe that they are making cuts to spending because there is no choice and that it is the best way to get out of Liebour's mess.

Both are lies, and obvious lies. Because the simple fact is that there are no cuts. None whatsoever. In fact, the opposite is true. Both parties promote a fiction that is the opposite of the truth because it suits them, and to hell with the people they are elected to represent.

I agree with this. This is a flaw of the concept of democracy that Plato was well aware of. However, fact of the matter is that, even though democracy is obviously flawed, it's the least flawed of all the other available forms of government.