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The seductive allure of reverting to national European currencies

Ambrose Evans-Pritchard weighs in the Daily Telegraph with thoughts about Greece, southern Europe and the fact that so many countries, such as Italy, Portugal and Greece, cannot cope with the euro. The logic of this, the article seems to imply, is that these nations should revert to their previous national currencies.

For reasons that some regulars at this blog will recall, I think this idea of reverting to purely national currencies is simplistic, and not just because the practical logistics of switching back to pesetas, liras or drachmas will be painful (for example, there is the issue of repaying euro-denominated debt). A national fiat currency, such as the old Italian lira, is still a form of state-issued monopoly money, liable to be abused and printed in vast amounts. Evans-Pritchard talks about the need for affected nations to be able to devalue their currencies so as to boost exports. But if you devalue – ie, print more of it – your currency, then the price of imported goods soars. Greece, for instance, imports a lot of things and is not a major exporter of goods or services, apart from some agriculture and so on. Devaluation may be good for Greece’s important tourist trade, but not so great in terms of keeping a check on inflation.

Detlev Schlichter, champion of what he calls “inelastic money”, has scorned the idea that reverting to national fiat moneys represents a step forward for the debt-laden countries of southern Europe.

Here are two paragraphs:

“One frequently gets the impression from reading the mainstream media that Greece has a monetary policy problem and not a fiscal problem. This is incorrect. Yet many commentators seem to argue along the following lines: This crisis is due to the straitjacket of the single currency with its one-size-fits-all monetary policy, or at least aggravated by the constraints of this system. Greece would have more “policy options” in dealing with its troubles if it had control of its own national currency.”

“Then there is, connected to this, an underlying – and not very flattering – notion that the Greeks are somewhat unfit to live and work in a ‘hard money system’, which presumably the euro is. The Greeks, this seems to be the allegation, like borrowing and spending too much. I am paraphrasing here but this is certainly the underlying tone of the narrative. The Germans and Dutch and French can live without the constant aid of conveniently cheap national money – but the Greeks can’t.”

These countries’ appalling fiscal problems would not be altered one jot by the quick fix of switching one transnational form of fiat money in exchange for a national form of fiat money. What these countries need is honest money that retains its value over time. I get the impression that were Greece, for example, linked to the old Gold Standard of the pre-First World War variety (which worked relatively well for its constituent members until the war destroyed it), Mr Evans-Pritchard would be objecting to that also. But the problems of these countries cannot be resolved by nation-state fiat funny money. Mr Evans-Pritchard, for example, suggests that the “PIIGS” countries need the equivalent of a 40 per cent devaluation against, say, Germany and France. Under a gold standard and a regime of small governments and flexible labour markets, no such a drastic shift would occur. Real wages in certain uncompetitive sectors would decline, and wages in more competitive ones would rise. Take the case of Greece: under a stable monetary system, Greece’s tourist industry would be able to compete splendidly so long as its costs were controlled. And this leads to the core of the issue: flexible rates of exchange between different fiat money systems appeal to those who don’t want to undertake the more painstaking route of curbing government, encouraging free markets in labour, etc. Devaluation will always appeal as an easy way out.

Schlichter has more thoughts on the recent attempts by EU states to shore up the euro.

Update: Of course, I can imagine some defenders of devaluation arguing that this reduces the real incomes of people in a country, which makes that nation more competitive, hence achieving the same sort of result as a decline real wages under the conditions of a fully flexible labour market. The problem is that the former approach makes no distinction between sectors or businesses. Also, the history of post-war Europe does not suggest that devaluation is much of a cure for deep-seated economic ills. The decline in the value of sterling in 1967 did not arrest Britain’s relative decline; when West Germany had a strong deutschemark in the 1970s, it was economically strong. True, the fall of sterling from the exchange rate mechanism in 1992 coincided with an improvement, but then again, the UK’s fiscal position was in relatively good shape and the UK labour market did not have some of the burdens of today.

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53 comments to The seductive allure of reverting to national European currencies

  • And it’s not like they can’t always hitch their old “independent” currencies to the Euro – the Swiss just did. To Evans-Pritchard’s defense though, I sense this as the underlying sentiment in his piece, and I find it difficult to blame him.

  • James Waterton

    If one must tinker with fiat currencies, this mediocre armchair economist says that currency devaluation would be one of the least bad options for Greece, if it were available. Saying the tourist industry is an important part of the Greek economy is rather like saying breathing is an important part of staying alive. Getting the tourism sector back on its feet by making it attractive to foreigners would provide a lot of jobs for the soon-to-be unemployed public servants.

    And (I admit my knowledge here is a little shaky) – remembering back to my old Econ classes… devaluation only triggers inflation if there’s little spare capacity in the economy, right? However, I suspect there’s plenty of spare capacity in the Greek economy in the parlous state it’s in at present. Don’t quote me on this, however…

  • Saying the tourist industry is an important part of the Greek economy is rather like saying breathing is an important part of staying alive.

    Indeed. A friend just got back from Greece and he is not looking forward to going back (which he will have to) – and that was not at all the case only a couple of years ago.

  • Paul Marks

    Economics classes (in almost all schools and universities) are useless. “Devaluation” does not cause inflation – indeed the cause and effect is the other way round.

    When there is monetary expansion (the real definition of inflation – rather than “prices rising in the shops” or whatever fools tend to define “inflation” as) of one fiat currency but not another then the first will (evetually) decline in its exchange rate to the second.

    As for government efforts to rig (“fix”) exchange rates (such as the effort to pretend that the Pound was worth X Dollars in 1925) that is too absurd to waste time upon.

    Still back to the idea of going back to national fiat currencies…..

    The debt of nations like Greece is in Euros – by contract (if contracts mean anything any more – which is highly doubtful) it must be repaid in Euros.

    That is why banks (and others) were so keen in to lend to the Greek government in the first place (they believed that the Greek government would not just be able to inflate, create new money, to repay them – but would have to REALLY repay them).

    However, the Greek (and other?) governments seem to be planning default anyway (without even the legal fiction of an inflationary “repayment”). For example, the E.U. leaders have already agreed to a 50% default (“haircut”) for Greek governmend debt. By the way the main attack on this (even from supposedly conservative people like David Davis) is that the default is not big enough – that it should have been a 75% default (or whatever).

    As for the banks – no one appears to support bankruptcy (what would happen under free enterprise), instead they are to be “recapitalized” (bailed out) according to the doctrine of Corporate Welfare (the central principle of the Economist magazine and so on) under the system of “Crony Capitalism” rather than free enterprise.

    On the debate between the Euro and national fiat currencies.

    The debate appears to be between those who favour the monetary expansion (inflation) of the Euro, and those who favour the monetary expansion (inflation) of restored national fiat currencies.

    What I think of BOTH sides of this debate can not be written in a blog that might be read by persons of a tender age.

  • James,

    Devaluing the currency may not create price inflation during a depression, but this doesn’t mean it doesn’t have other harmful effects, as I recently tried to explain in one of my postings http://wp.me/p1O9ar-26.

    As Johnathan says in the OP, devaluing helps exports at the cost of imports – why should we decide the exports are more important?

    And although we may not see prices rise, it is possible that devaluation prevents prices from falling, and so prevents us from enjoying a higher standard of living in this way.

  • Paul Marks

    As for the out of control Greek Welfare State (the true cause of the Greek economic crises – contrary to the claims of Max “hang the banksters” Kaiser)….

    Of course switching to a national fiat currency would not save it. Nothing can save the Greek out of control Welfare State – or the other out of control Welfare States either.

  • Paul Marks

    Andrew Frit – you most likely know the following, but other people may not.

    The exchange rate of a currency (like the exchange rate of anything else) is determined by the buyers and sellers of that currency.

    So to talk of “devaluation” (or “revaluation”) makes no sense.

    Unless a government is trying to rig (“fix”) the exchange rate of its currency in terms of another currency (as, for example, the Chinese government tries to do with its currency in relation to the U.S. Dollar).

    Such a policy is absurd. As absurd as any other form of price controls.

  • why should we decide the exports are more important?

    Because exports create jobs. The fact that people want jobs in the first place because they want to buy stuff is always ignored, of course.

  • Philip Scott Thomas

    Paul –

    …the E.U. leaders have already agreed to a 50% default (“haircut”) for Greek governmend debt.

    Not quite, if you mean that Greek government debt is to be reduced by 50%. It is much worse, than that.

    What the EU leaders have decided is that foreign, private-sector lenders will take a haircut of 50%. Foreign, public-sector lenders, such as the IMF and the ECB, will take no haircut, nor will domestic, private-sector lenders, such as the Greek banks.

    The problem is that foreign, private-sector lenders are not the majority of Greek debt-holders. As a result, the total Greek debt burden is to be reduced by only about 20%, which is insufficient.

  • Rob H

    The problem with devaluation is that what it gives in one hand (export growth) it taketh away with the other (imported materials/energy costs) so while you get to sell more goods you make less money and that is jus the exporters.

    All your jo public in the national economy have less money because their energy and food costs have gone up but their income has not and they have nothing to export.

  • PeterT

    To my mind there is no doubt whatsoever that Greece would be better off if it could devalue its currency. For the same reason that a minimum wage causes unemployment, so too does a too high exchange rate. A devalued currency would increase the employment of productive resources. There would of course be a problem of euro denominated debt, but its not like they are able to pay that at the moment.

  • I am grateful to Schlichter for pointing this out. Whether Greece stays in the Euro or not its government is going to be breaking no end of promises.

    There is something that disturbs me. In 1931 Britain left the Gold Standard (the Euro of its day (in respect of being fixed)). Britain recovered. In fact I believe I am right in saying that Britain had an easier time of it in the 1930s than any other major country. Why?

  • John K

    I wouldn’t so much say that Greece should devalue its currency (if it still had one of its own), rather that the Greek currency should be worth less than, say, the German currency (again, if they still had one). The Greek economy is weaker than the German, and probably always will be. The idea that they can share the same currency, and borrow at the same interest rate, was always going to fail

  • Aetius

    While in economic terms it may be a bit like back from the fire into the frying pan, in political terms the re-introduction of national fiat currencies is most definitely a very big step forward. The European project has always relied on its inevitability and irreversibility. Once a couple of states have re-introduced national currencies, the EU’s will be seen for the confidence trick it is.

  • Fraser Orr

    >Greece would be better off if it could devalue its currency.

    I find the whole thing bizarre. The Greek Government is spending too much money, so what are the solutions we have available? Well the Germans should pay the shortfall, or the banks should pay the shortfall, or, via “devaluation” the Greek people and others with Greek paper should pay the short fall.

    (The craziest suggestion I have heard is that the Americans should pay the shortfall — that would be because we are so wise with our own money and have a huge stash to pay out for anyone who asks.)

    Why, precisely, is there so little talk of the obvious — namely don’t spend more money than you have?

    Devaluation is nothing short of theft. It is taking money from the prudent and giving it, or a small fraction of it, to the profligate.

    However, one thing that the floating currency systems of the world do have going for them — being a market they tend to punish and reward based on real measures rather than political vanities. Problem is the Greeks are bitching about their bitter medicine.

    I am reminded of a comment someone once made. To say the Greeks are spending like drunken sailors, is an insult to drunken sailors. At least drunken sailors only waste their own money. And they go back to work when their purse is empty and their hangover cured.

  • 'Nuke' Gray

    Well, I, for one, hope that the Euro fails- because the only other option which is given is that Europe integrates even further! Eurotopia for real! I don’t think we’d like that outcome. I think we need a new designation- Bureautopia!

  • Gareth

    Fraser Orr said: “Why, precisely, is there so little talk of the obvious — namely don’t spend more money than you have?”

    They have their budget plans and will stick to them even if it kills them!

    I think they don’t favour massive tax hikes or massive GDP shrinkage and the subsequent unrest either would cause – the former amongst taxpayers and the latter amongst public sector workers and those reliant on taxpayer support. GDP shrinking would also make their debt to GDP position look much worse.

  • Les Hardie

    About five years ago, my daughter and fiancé, both working on their PhDs in agriculture at UC Davis, spent three months in Volos, Greece, working on a horticultural project. Their Greek colleagues were mostly from the public sector. The group spent many hours during the workweek at seaside cafes, having long lunches well lubricated with uzo. A little bit of work was done, but not much. They found the Greeks lovely and friendly but lazy. Greeks laughed about the infinite ways they avoided taxes, but expected to have lifetime employment with fat benefits. Everybody wanted “to work” for the government, but do as little as possible. They thought it was perfectly fine for any group to call a general strike whenever they wanted, which everyone automatically supported. They were unaware they were heading toward disaster. This anecdote confirms much about what others nave said about the Greek’s attitudes and why they are now a basket case.

  • hitnrun

    “A national fiat currency, such as the old Italian lira, is still a form of state-issued monopoly money, liable to be abused and printed in vast amounts.”

    I suppose it depends on whether you’re looking at the ideal answer for everyone or writing off the PIIGS as a lost cause.

    If you’re still entertaining the idea of Europe moving forward (together or separately) toward recovery and prosperity, then yes, a careful transition to sound money is the best policy.

    If you’ve come to the conclusion that the basket cases are doomed in the near future – whether by revolt of the Greek deadbeats or the German taxpayers – it makes more sense to simply revert to national currency and let the spendthrifts promptly print themselves straight to Hell or Zimbabwe.

  • AzA

    This fits nicely with what I’ve been trying to tell my high school IB Economics students in class. Devaluation will do little for the Greeks when they don’t have anything to export. They have almost no manufacturing base.

    And meanwhile, a devaluation would send import prices way up. And for the same reason I stated above, they don’t have domestic products they can replace them with.

    They are screwed.

  • I suppose you could look at it like this- the Greek currency is overvalued, so a devaluation would in effect be a market adjustment.
    profligate politicians merely being the mechanism by which the market adjusts, much like housebuyers refusing to buy at high prices is the mechanism by which the market adjusts overvalued house prices.

  • I suppose you could look at it like this- the Greek currency is overvalued, so a devaluation would in effect be a market adjustment.
    profligate politicians merely being the mechanism by which the market adjusts, much like housebuyers refusing to buy at high prices is the mechanism by which the market adjusts overvalued house prices.

  • This piece is great, except that it misses the problem entirely.

    The problem is not that Greece (and Portugal, Italy and Spain) should not accept a strong currency, transnational or otherwise, for the benefit of their economy. The current problem is that it is utterly impossible for the Greek government to service current debts at all. Neither is Ireland by the way, as a deliberate policy of the EU and ECB it has been rendered bankrupt.

    The underlying problem is that the Greek government is unwilling to exercise fiscal discipline. Under a Greek currency that was forced on them by the markets; inflation was a response to Greek profligacy that wiped out that profligacy, albeit at great cost to private enterprise.

    Greece cannot stay in the Euro. It is not a case of choice, the nation will default at some point. By populist vote of riots (when the government is unable to borrow Euros and so sacks most workers and shuts down most welfare, with nothing to pay for these things) or by orderly action, therefore, Greece will leave the Euro.

  • egoist

    Wouldn’t it – perhaps – be more painful for the nationals than the continent? In other words, they’d be more-so sleeping in their own beds, and not dragging the rest of us in with never-ending piles of Euros (backed up or swapped by dollars)?

  • I find the whole thing bizarre. The Greek Government is spending too much money, so what are the solutions we have available? Well the Germans should pay the shortfall, or the banks should pay the shortfall, or, via “devaluation” the Greek people and others with Greek paper should pay the short fall.

    Liquidate the assets of the Greek politicians and use that to pay down the debt. It won’t help much in terms of actually paying down the debt, but perhaps it will send a message to other politicians.

    I know it’s not very libertarian to say this, but I almost wouldn’t mind seeing screaming politicians dragged from their houses at gunpoint, trying to hold on to the door jambs in order not to be taken away.

  • Joe Blow

    These countries’ appalling fiscal problems would not be altered one jot by the quick fix of switching one transnational form of fiat money in exchange for a national form of fiat money.

    No, but the fiscal problems of Northern Europe would sure be greatly alleviated.

  • Allen Moore

    This blog is written from the point of view of Greece. But what about the point of view of Germany and the other northern countries? The advantage of switching to national currencies is that now Greece is free to do whatever it wants, without dragging down the rest of Europe. Ever since the Euro was introduced it was destined to fail. The only question now is how much good money the northern countries will throw away in a vain attempt to save it.

  • Walter Sobchak

    If the Greeks are unable to manage their economy with the Euro, why will they do any better with a gold standard. They will still be feckless and irresponsible, they will run out of reserves, and be unable to maintain the currency.

    What they should do is do what they really want to do. They should adopt a fiat currency, and full out communism. The former will result in Zimbabwe style hyperinflation, and the latter will destroy their remaining production. Then they will be truly miserable, but they will have no one to blame but themselves.

  • Three options only. Inflate and cheat creditors and savers.
    Tax and impoversh the people. Likely get your head handed to you, too. Default and cheat creditors and impoversh the entitlement class including lots of civil servants.
    The third option will unleash the economy because it will destroy the entitlement funding mechanism and all non-essential government functions and in one fell swoop make deficit spending impossible. It will force a pure capital economy with credit markets drawing from real capital reserves and not fiat money.
    Default is not only the answer, it is what will happen. The only question is will it come before or after war?

  • Walter Sobchak, people only behave recklessly with other people’s money – which was what the Euro essentially was for Greeks and other PIIGS. Cut off the supply of money for nothing, and after a period of adjustment (granted, a painful and ugly one), everyone is forced to live within their means. I see no reason why Greeks should be any different from anyone else. Sure, they don’t have the German work ethic, but most of them do work for a living. So they will not reach the German standard of living, so what.

    Greece has an almost endless export potential, and that is tourism. If they adopted real free markets, got rid of the endless regulation and the crippling corruption that comes with it, and lowered their expectations (which were inflated by politicians, domestic and foreign, anyway), they could do very well indeed.

  • …and of course get rid of the “entitlements”, but that goes without saying.

  • Ekon

    I disagree with your perspective for several reasons:

    1) ”Assume a can opener”. It would most likely actually be feasible for Greece to re-adopt its own currency. The notion of Greece rapidly making its labour market, etc. more flexible (not just a little more flexible, it needs to absorb a huge re-adjustment rapidly) is a pie-in-the-sky proposition, to put it mildly.

    2) More expensive foreign goods and less expensive domestic goods is exactly what Greece needs. If this will lead to domestic inflation depends on the exact pattern of price changes.

    3) Regarding Mr. Schlichter, yes, Greece has a worse economic system than Germany and the Netherlands. Noticing this fact makes you in tune with actual reality. In addition to this, Greece is in a state of acute crisis, another significant difference to the aforementioned countries. Yet he dismisses these observations with nothing more than a sneer.

    4) Re: Gold standard. Pegging a new Drachma to gold would perhaps actually work, if the peg was adjusted to a more realistic level. But that is not really a realistic alternative, no?

    5) You note: ” And this leads to the core of the issue: flexible rates of exchange between different fiat money systems appeal to those who don’t want to undertake the more painstaking route of curbing government, encouraging free markets in labour, etc.”

    Indeed. Because the odds of Greece actually undertaking ” the more painstaking route of curbing government, encouraging free markets in labour, etc.”, and doing so effectively before the country has been damaged on a deeper level, is effectively zero.

    You have noticed what is actually going on in Greece, no? In comparison to undertaking a rapid overhaul of the entire Greek economy (one might say society), letting go of the Euro is a splendidly simple and workable option.

    PS.
    You note: ” True, the fall of sterling from the exchange rate mechanism in 1992 coincided with an improvement, but then again, the UK’s fiscal position was in relatively good shape and the UK labour market did not have some of the burdens of today.”

    You can add in the Swedish experience at the same time as well. Sweden made a big show of its ”hard money” policy, pushing interest rates sky-high to defend the peg of the Krona, with rather disastrous results for the real economy. Eventually, they were forced to relent and let the Krona float. Normalization and recovery followed.

    /Econ

  • Ekon

    “And it’s not like they can’t always hitch their old “independent” currencies to the Euro – the Swiss just did.

    To Evans-Pritchard’s defense though, I sense this as the underlying sentiment in his piece, and I find it difficult to blame him.”

    Im curious, in what sense does the Swiss peg to the Euro go against the argument of Evans-Pritchard? If anything it underscores the value of having discretion in monetary policy.

    Indeed, on a deeper level, this is an example of the Swiss attempting use their currency to circumvent the domestic price system, exactly the practice that the author of this piece is opposed to.

  • If anything it underscores the value of having discretion in monetary policy.

    How so, Ekon?

  • LarryD

    With allowances for the fact that these are statistical comments, not applying to all Greeks; Greece’s problem is that too many Greeks demand to live well beyond their means, Greece doesn’t want loans, it wants subsidies. The fiscally responsible nations of the EU need to throw Greece out before their populations are reduced to being serfs of the Greeks.

    This will be easier if the Greeks think this is their own idea, hence the arguments are phrased as advantages to the Greeks if they had their own currency, which they would be able to inflate.

  • Johnathan Pearce

    Doubting Rich:

    “The problem is not that Greece (and Portugal, Italy and Spain) should not accept a strong currency, transnational or otherwise, for the benefit of their economy. The current problem is that it is utterly impossible for the Greek government to service current debts at all. Neither is Ireland by the way, as a deliberate policy of the EU and ECB it has been rendered bankrupt.”

    I don’t doubt that Greece will leave the euro. My point is that its problems will not be radically changed by going back to national fiat money which is not grounded in any kind of stable system.

    Right, let’s turn to Ekon’s points:

    “It would most likely actually be feasible for Greece to re-adopt its own currency. The notion of Greece rapidly making its labour market, etc. more flexible (not just a little more flexible, it needs to absorb a huge re-adjustment rapidly) is a pie-in-the-sky proposition, to put it mildly.”

    In other words, Greece “tackles” its problems by slashing the real incomes of its people via a devaluation. I am sure that will be as politically palatable as say, reducing its government.

    True. Then again, devaluation is not going to help, quite the opposite unless the Greeks can persuade other countries/banks/private citizens to just write all this debt off.

    “The underlying problem is that the Greek government is unwilling to exercise fiscal discipline. Under a Greek currency that was forced on them by the markets; inflation was a response to Greek profligacy that wiped out that profligacy, albeit at great cost to private enterprise.”

    Inflation is a kind of tax, true. And it has a habit of accelerating.

    Greece cannot stay in the Euro. It is not a case of choice, the nation will default at some point. By populist vote of riots (when the government is unable to borrow Euros and so sacks most workers and shuts down most welfare, with nothing to pay for these things) or by orderly action, therefore, Greece will leave the Euro.T

    “old standard. Pegging a new Drachma to gold would perhaps actually work, if the peg was adjusted to a more realistic level. But that is not really a realistic alternative, no?”

    It may not be politically realistic since nearly all of the world’s governments believe in fiat money due to the obvious lure of fleecing their own electorates. But a stable system of money is not quite as fanciful as it sounds. And I would be willing to bet that if fiat money systems do collapse, then something else will have to be considered.

    “You have noticed what is actually going on in Greece, no? In comparison to undertaking a rapid overhaul of the entire Greek economy (one might say society), letting go of the Euro is a splendidly simple and workable option.”

    It may be “splendidly simple”; whether it is workable depends on whether other reforms are put into place. As I said in my original post, just switching currencies as a sort of magic wand solution is delusional.

    “Regarding Mr. Schlichter, yes, Greece has a worse economic system than Germany and the Netherlands. Noticing this fact makes you in tune with actual reality. In addition to this, Greece is in a state of acute crisis, another significant difference to the aforementioned countries. Yet he dismisses these observations with nothing more than a sneer.”

    I saw no sneer. Rather, it is patronising to the Greeks to argue that they are incapable of living with a world of inelastic money where the price of borrowing depends on the supply and demand for real savings, not central bank funny money. In other words, he is arguing that the Greeks can be, and should be, treated like adults. (A lot of the underlying message of some critiques is that the Greeks are just too tender for the harsh realities of the world).

  • Ekon

    “How so, Ekon?”

    Because even the Swiss don´t seem to trust their domestic price mechanism enough to be content to have uber-strong money. The Euro peg after all aims to make the swiss franc weaker.

    And if the Swiss don´t trust their domestic markets to be flexible enough (to avoid problems of mis-pricing), what are the odds of the Greeks being able to rapidly make their price system flexible enough to fix the imbalances in their economy?

  • Ekon

    Johnathan,

    Some of the points under the ”Reply to Ekon” heading are not mine. I don´t know if that´s intentional or not, but just want to note that before we continue. Discussion continues below:

    J: ” In other words, Greece “tackles” its problems by slashing the real incomes of its people via a devaluation. I am sure that will be as politically palatable as say, reducing its government.”

    Generelly, yes, making people poorer through making imported goods more expensive and domestic production cheaper through currency devaluation is politically much simpler and palatable than systematic wage decreases, etc. (The problem of Greek factors of production being systematically overpriced is not limited to the public sector).

    J: ” It may be “splendidly simple”; whether it is workable depends on whether other reforms are put into place. As I said in my original post, just switching currencies as a sort of magic wand solution is delusional.”

    The switch would be coupled with the (inevitable) haircut (I.e. default), of course.

    And there really is no ”solution” as such. Greece will suffer. The question is how we can make that suffering as non-destructive to the Greek social fabric as possible. Given the actual situation on the ground in Greece, expecting its domestic price system to absorb the entire required readjustment is, in my opinion, totally unrealistic. Hence the need for a revalued Greek currency. The main virtue of a floating currency is that money markets are much more flexible than politicians, employees, unions, etc. after all.

    J: ” I saw no sneer. Rather, it is patronising to the Greeks to argue that they are incapable of living with a world of inelastic money where the price of borrowing depends on the supply and demand for real savings, not central bank funny money. In other words, he is arguing that the Greeks can be, and should be, treated like adults. (A lot of the underlying message of some critiques is that the Greeks are just too tender for the harsh realities of the world).”

    In practice, however, the Greeks are handling the need to make themselves poorer (through smaller imports, lower real wages, etc.) in a decidedly non-adult fashion.

    I see no reason that this will change in the near future, and Mr. Schlichter offers none, save for a (in my opinion, sneering) appeal to a vague ideal of universal human equality. Sadly, that ideal stands at odds with observed reality.

  • I think I’ll better rephrase and clarify my question, Ekon: what is the value to Switzerland and the Swiss people in the Swiss National Bank’s pegging the Swiss Franc to the Euro, and how does that pegging prove that same value? Or are we talking past each other here?

  • Ekon

    “Ekon: what is the value to Switzerland and the Swiss people in the Swiss National Bank’s pegging the Swiss Franc to the Euro, and how does that pegging prove that same value?”

    The (self-perceived at least) value lies in making the Swiss Franc weaker relative to the Euro in a situation where the Swiss government feared that the domestic price system would not be capable of adapting to the appreciation of the currency against the Euro rapidly enough.

    I find this interesting, because evidently not even the hard-money world champions, with a society and a domestic market that functions better than most, are themselves comfortable with the thought of having to adapt to the currency shock through the domestic price system, and appear to value having some discretionary power over its own currency valuation.

  • Johnathan Pearce

    Ekon, some glitches in my post. Sorry for any confusion.

    “Because even the Swiss don´t seem to trust their domestic price mechanism enough to be content to have uber-strong money. The Euro peg after all aims to make the swiss franc weaker.”

    I know, and I think the Swiss are committing a gross mistake in trying to flood the world with cheap Swiss francs. One of the few hard fiat moneys is now going down the same, disastrous route.

    “Generelly, yes, making people poorer through making imported goods more expensive and domestic production cheaper through currency devaluation is politically much simpler and palatable than systematic wage decreases, etc. (The problem of Greek factors of production being systematically overpriced is not limited to the public sector).”

    I guess that depends on whether you can fool the public enough of the time. We shall see.

    “The question is how we can make that suffering as non-destructive to the Greek social fabric as possible. Given the actual situation on the ground in Greece, expecting its domestic price system to absorb the entire required readjustment is, in my opinion, totally unrealistic. Hence the need for a revalued Greek currency. The main virtue of a floating currency is that money markets are much more flexible than politicians, employees, unions, etc. after all.”

    I agree with that final sentence. I also agree that preserving the Greek social fabric is worth achieving. Whether inflating away their massive debts and not making any serious changes to the corrupt, fiscally incontinent system of that country is good for the “social fabric” is an open question. I would argue that the issue of runaway spending, over-regulation and so forth is not a great testimony to the “social fabric”.

    “I see no reason that this will change in the near future, and Mr. Schlichter offers none, save for a (in my opinion, sneering) appeal to a vague ideal of universal human equality.”

    How is it “sneering” to talk about how Greeks should be treated as adults like anyone else? Your remarks are baffling. I have met DS many times and one thing he doesn’t do (unlike some people I can mention BTW), is sneer. His articles are the model of scholarly good manners (I wish more could write in this way). And if the Greeks, or any other group of people, feel patronised by his sort of comment, they are truly fucked.

  • Anthony

    Freeing one part of a semi-market economy while not changing anything else can have disastrous consequences. If the action is taken in response to a crisis, the results are likely to make the crisis worse, even though inaction may have been even worse.

    In Greece, there are multiple problems, some of which are the direct result of its government, and some of which are cultural problems of its people. Dropping out of the Euro and adopting a floating currency would allow the Greek government to lower wages across the board (which is hard to to otherwise because of government policy, government support of unions, and general cultural resistance to lowering wages). Combined with a partial or complete default on its bonds, a Greek government could use one or both actions to stabilize its government spending and the Greek economy, and put Greece on a path of real economic growth. However, there would be a lot of economic pain adjusting to that path, and the likelihood of any elected Greek government actually doing that before the crisis gets much worse is pretty low.

    Incidentally, I don’t understand why it is considered not possible for Greece to default yet remain in the Euro, as if there were some sort of logical contradiction involved. California could default on its bonds (there are legal obstacles, but those can be circumvented), but nobody would think that would require California to leave the dollar.

  • Ekon, your replies sound to me like the following: “There’s a value in this pegging because the Swiss National Bank thinks there’s a value in this pegging.” Am I the only one who sees the problem with that logic?

    The reality is, of course, is that there is no net value in this pegging, at least not for the Swiss

    people

    , as JP rightly points out.

  • Sorry, hit ‘quote’ instead of italics…Again:

    Ekon, your replies sound to me like the following: “There’s a value in this pegging because the Swiss National Bank thinks there’s a value in this pegging.” Am I the only one who sees the problem with that logic?

    The reality is, of course, is that there is no net value in this pegging, at least not for the Swiss people, as JP rightly points out.

  • 'Nuke' Gray

    Of course, Europe could become a 2-zone entity, with a strong northern Euro, and many national currencies in the rest. Perhaps the Euro then becomes the inter-country money when trading between european nations. But I suspect that the Eurozone core would then become an over-regulated monster.
    How is the pound doing, by the way?

  • Laird

    We’re now being treated to the spectacle of the Greek people actually being given a say (via referendum) on the medicine they’re being forced to swallow. That in itself is extraordinary enough, but the howls of outrage coming from all corners of Europe, and all segments of the political class, suggests to me that it’s precisely the right thing to do. Sarkozy, Merkel, et al, are determined to force money (tied to as-yet unspecified strings) upon Greece, even in the face of mounting discontent from their own citizens, and now those insolent (and indolent) peasants have the temerity to want a vote on accepting their beneficence? Don’t they know they owe a duty of unquestioning obedience to their superiors in Brussels and Paris?

    Personally, I think Greece should (in this order): (1) accept the ECB’s money with a smile; (2) withdraw from the euro and re-establish its own national currency (drachma or whatever); and (3) default on its sovereign debt. Whether or not it devalues the currency isn’t particularly important, because even if it doesn’t do so formally the lack of access to foreign borrowings (it will be a few years before the morons at the money center banks begin lending to Greece again*) will inevitably force the Greek government to massively inflate their currency. This will have much the same effect as a devaluation, and will serve to effectively lower labor costs and thus move that market back toward reality. (The Papandreou government won’t survive, but it isn’t going to anyway.) France and Germany will then have to bail out their own banks, but what do the Greeks care about that? I wouldn’t.

    None of this requires a referendum, of course; that just stirs the pot and adds to the fun.

    * Greece has a long history of defaulting on its debt, and that has never stopped foreign banks from resuming lending to it again a few years down the road.

  • Ekon

    “Ekon, your replies sound to me like the following: “There’s a value in this pegging because the Swiss National Bank thinks there’s a value in this pegging.”

    Am I the only one who sees the problem with that logic?

    The reality is, of course, is that there is no net value in this pegging, at least not for the Swiss people, as JP rightly points out. ”

    Well, there really is no sure way to find out, no, hence my careful wording. Economics is simply too imprecise a science. Saying that there “of course” is no value in pushing down the value of the franc seems to me overconfident.

    What we can at least say that even the leadership of a country that is amongst the most market-oriented and well-functioning in the world, and that has the perhaps most well-regarded currency in the world disagrees with you regarding the unimportance of the exchange rate mechanism.

  • Ekon

    J: “I know, and I think the Swiss are committing a gross mistake in trying to flood the world with cheap Swiss francs. One of the few hard fiat moneys is now going down the same, disastrous route.”

    Well, we will see. My personal guess is that going from a ridiculously strong currency to a somewhat less ridiculously strong currency will not really harm the Swiss, and might actually help them avoid some adjustment costs.

    J: “I guess that depends on whether you can fool the public enough of the time. We shall see.”

    I don´t really see it as “fooling” anyone. It´s simply just harder and costlier, both on a real and political level to slash every wage contract, etc. compared to just letting the currency float.

    J: “I agree with that final sentence. I also agree that preserving the Greek social fabric is worth achieving. Whether inflating away their massive debts and not making any serious changes to the corrupt, fiscally incontinent system of that country is good for the “social fabric” is an open question. I would argue that the issue of runaway spending, over-regulation and so forth is not a great testimony to the “social fabric”.”

    That Greece is already a weak country and a weak state in my opinion makes it even more unlikely that the country will be able to implement the kind of reform that you see as the alternative to default and currency float. I don´t really see Greece “inflating away” their debt – I see them defaulting on it outright. The currency float is more aimed at adapting the cost/pricing structure of Greece to the real world.

    J: “How is it “sneering” to talk about how Greeks should be treated as adults like anyone else? Your remarks are baffling. I have met DS many times and one thing he doesn’t do (unlike some people I can mention BTW), is sneer. His articles are the model of scholarly good manners (I wish more could write in this way). And if the Greeks, or any other group of people, feel patronised by his sort of comment, they are truly fucked. ”

    First, I should say that I don´t regard sneering as a fatal character flaw. I sneer sometimes (for good or bad reasons)…

    Still, I didn´t see his dismissal as being sneering at the Greeks, but rather at those who note that Greece is a deeply dysfunctional country that is indeed less functional on multiple levels than Germany and Holland.

  • Johnathan Pearce

    Ekon:

    “Well, we will see. My personal guess is that going from a ridiculously strong currency to a somewhat less ridiculously strong currency will not really harm the Swiss, and might actually help them avoid some adjustment costs.”

    The Swiss are – for now – lucky in having relatively muted inflation, plus, of course, a solid financial sector, although that is coming under relentless attack from the anti-tax haven campaigners. While the strong Swiss franc is not good for that country’s exports (such as the big engineering and pharma firms in Switzerland), having a strong currency is obviously good for the banks’s clients as they know the value of their deposits is not eroding. Banking makes up about 13 per cent of Swiss GDP. If Switzerland loses some of its reputation for having one of the world’s most reliable currencies, that is bad in the medium term, in my view.

    “It´s simply just harder and costlier, both on a real and political level to slash every wage contract, etc. compared to just letting the currency float. ”

    Well, if Greece returns to its old drachma, then the real cost of the debt in euros it must repay will soar. If the Greeks are as feckless and childish as you say, achieving such a repayment will be hard, in fact impossible. I just don’t get this idea that devaluation is some sort of soft option. I happen to think that Greece’s exit from the euro, however, is inevitable, not least because other eurozone countries will not longer tolerate its membership. Greece will struggle to attract inward investment in the future if it is seen as unreliable. Its main hope lies with tourism.

    Still, I didn´t see his dismissal as being sneering at the Greeks, but rather at those who note that Greece is a deeply dysfunctional country that is indeed less functional on multiple levels than Germany and Holland.

    Sorry, this does not make sense. He is not sneering at people for saying Greece is dysfuctional in terms of its inability or unwillingness to honour its debts. He is saying that it is a mistake to imagine that Greece is incapable of living under a system of stable money and that only endless inflation will work.

    Oh, and the Greeks are not getting their marbles back from the British Museum. Oh no.

  • JP, are you saying that they’ve finally lost their marbles?;-)

  • 'Nuke' Gray

    I think you’re onto something, Alisa! If the British Museum gave back the marbles, maybe the greek nation would start behaving sensibly! It’s worth a shot, surely!:)

  • Pat

    Sorry but your mistaken- or rather you have focussed on the second half of the solution.
    For Greece (or anywhere else) to prosper it must be efficient and have a stable currency. That efficiency will not be created quickly. Unless someone is prepared to give, not lend, money to cover the period whilst efficiancy is being improved then default, decouple and devalue is their only immediate option.
    Dunkirk was necessary if the second world war was to be won- but it was nowhere near sufficient.
    Oh, I am well aware of the likelihood that Greece will default, and then fail to improve efficiancy, it’s what they’ve always done, but without the first step the second is impossible.

  • I do think we will see national fiat money and it is pragmatic and expected that the State would issue its own and not be beholden to another. However, this does not demand that that national currency is monopolistic.

    The State can issue their currency via their Bank, e.g the UK still issues Pounds via the BoE, but other banks and entities issue their own currencies. As people see the devaluation of a currency “backed” by tax revenues alone, they will store wealth in others more stable, converting at the last minute to pay taxes.

    With the population exposing the State currency to reality microsecond by microsecond, there may be hope.