Ireland and the Euro
Will Hutton has said something about the Euro which I bring up every time I discuss it, with friends, colleagues or in blog entries. It is as follows:
Nobody pretends the euro is perfect. It was probably too ambitious to incorporate weak members with the strong so soon.
Too ambitious by half.
Plenty of bloggers are reminding themselves and each other that the euro is not to blame (lib dem voice; Phillip Legrain for example), and principally this is Hutton’s line as well, but rather thinks the union should be reformed – teasing out the difference between left and right wing euroscepticism along the way.
The right may have nationalist and sovereign interests as their main concern, but the left are not opposed to a single monetary union, just opposed to one geared at concentrated capital movement, reducing nations within that union to massive wealth disparities.
Though EU reformers recognise this, and it is precisely Hutton’s point – supporters of the EU, in the name of a free market, are not learning the lessons of history, favouring floating exchange rates and leaving the door wide open for explosions, caused by excessive deficits or surpluses.
The eurosceptic left were never principally opposed to european integration, but much of the convergence criteria in the Maastricht Treaty. But Hutton is one example of someone who is pro-EU addressing those very concerns. Ireland and Greece, if nothing else, will see those ideas taken far more seriously by politicians.
There is a strong case that the Euro was at least partially to blame in that it prevented both Greece and Ireland from allowing their currency to devalue – a mechanism which helped the UK economy enormously. Whether or not that would have saved either country from a bailout I don’t know; it is of course possible that it would merely have delayed the inevitable.
Legrain’s post is interesting and a full response would be very long, so I won’t inflict that on you. But the main thing which struck me on a *very* quick read through was that he suggests that the uber-low interest rates could have been adjusted for by the Irish government running a surplus to depress demand. But isn’t the gross inability of governments to take the punch bowl away from the party the very reason we have independent central banks to set an interest rate? Now admittedly one can argue, given recent events, that central banks haven’t been exactly wonderful in that role either,but history does seem to support the view that governments are rather worse as in the case of, e.g., Ireland.
There is also a sense in which this is not a fundamental test of the Euro. One can argue that what has happened is a result of a misapplication of the concept by its too rapid expansion. The argument then runs that absent these nations which should never really have been in the Euro, the EMU will emerge stronger than before. I think you advance this view in your post.
A more fundamental test of the Euro, I submit, will come later in the cycle, when countries’ exit paths from recession become increasingly divergent. At this point there will be significantly different optimal interest rates for different nations. This is sure to put substantial stress on the institution. I think, though I hope I am wrong, that it will show the Euro to be fundamentally misconceived.
Well I think you may have answered your own question there with regards to central banks assessing sensible interest rates, but what also struck me with Legrain’s article – which I did advance in my post – is the notion of deficit and surplus countries exchanging without exchange rates. With the way in which reform is being spoken about by the likes of Hutton, this may be the thing which shows the Euro – as it is – to be fundamentally misconceived.
Erm, I don’t really understand your point about Legrain and Hutton – could you flesh it out?
As for central banks, well, one can make an argument that they should have been tighter, but I think we have to remember that inflation was pretty low, and that most of them were not too far off their targets. Which probably constitutes an argument for *better* targets. Governments are much, much worse at cooling economies.
You said “countries’ exit paths from recession become increasingly divergent … will show the Euro to be fundamentally misconceived (though you hope you’re wrong). What was fundamentally overlooked, in addition to your point, is the point Legrain and Hutton made, that is the problem which occurs as a consequence when nations running at a surplus and nations running at a deficit trade with each other without exchange rates. In short, the Euro has many more problems to come.
Maybe I’m being dumb but I really don’t see that in either of the articles.
“supporters of the EU, in the name of a free market, are not learning the lessons of history, favouring floating exchange rates and leaving the door wide open for explosions, caused by excessive deficits or surpluses.”
Isn’t Hutton’s point that floating rates lead to this and that EMU stops it? I don’t see how this translates into a fundamental flaw in the Euro…I mean the whole point of the Hutton and Legrain pieces is that the Euro isn’t fundamentally flawed, but that weak countries were let in when they perhaps shouldn’t have been. But “weak” isn’t the same as running a current account deficit – just ask the US.
We’ll never get anywhere until we get a marrying of the idea of looking after your own country and its trade first, with the idea of looking after the poor first.
If everybody ‘beggars their neighbour’ then economic fallacy of composition means that nobody gets beggared at all. Yet that then frees the domestic government to focus on the real job at hand – working out how to fit 4.8 million people wanting work into 480,000 vacancies.
I think this could be true if you place it in the context of labor flight. The problem inherent to the EU – the way it is – is twofold:
1) The capital argument; surplus and deficit countries trading together, without exchange rates, necessitates adjustments that hurt the economy elsewhere, such as the need to depress demand.
2) The labor argument; When a couple of years ago Bulgaria (then 73rd highest GDP, 14.1% below poverty line) and Romania (then 50th highest GDP, 25% below poverty line) entered the common market, this increased the capitalist playing field and incentivised labor flight thus jeopardising labor power in each of those nations.
That’s not looking after the poor first.
Agreeing partial with lethe here. I’m afraid Hutton doesn’t really understand it. See his point about Iceland. Yes, Iceland was hit even harder than Ireland, because of the nature of the financial crisis and the size of its financial sector. But look at how it recovered compared to Ireland (euro economy), Latvia, and Estonia (pegged to the euro) courtesy of Krugman. Seriously, having control over your currency is not a bad thing, whatever the apologists and idealogues say.
And I would argue, contra Lethe that democratic control over the Central Bank is important too. It seems to me that the argument that some things are too important to be left at the whim of elected politicians is rather a dangerous one. Sure, politicians will take actions that go against the interest of certain groups (perhaps people who hold a lot of cash, or large amounts of debt at nominal rates), but that is what democratic politics are for. We can argue about things, and change if we decide we need to.
Internationalism is great, but of the correct kind please. Well said, Neil!
It was interesting when Legrain said this about Ireland though:
“Granted, joining the euro involved slashing interest rates in Ireland – and cheap borrowing helped fuel the property bubble. But at a macro level, the Irish government could have tightened fiscal policy – in effect, run large budget surpluses – to dampen the boom. At a micro level, it could have limited banks’ reckless property lending – through higher and counter-cyclical capital requirements, for instance – rather than encouraging it with tax breaks.”
There is still some means for a country to have control over its economy, just not full control of it. Whether you see that as bad in itself I don;’t know, but certainly democratic politics are not out of reach in the EU, just partially absent today.
Agog: I agree with you about the democratic control of central banks from a normative point of view. My point was only meant to be a positive one – that governments are unlikely to ease off demand in the way that Legrain suggests.
@Agog and @Neil – why is “looking after your own country and its trade first” an idea worth marrying?
I am a British citizen but this “country” consists of a variety of groups, often of contradictory interests, some of which have no more in common with their opponents than they do with identically placed groups in other countries.
So when it comes to looking after “the poor” first, my contention would be that “the poor” across every country have more in common than “the poor” in one country and those in the same country for whom setting trade and social welfare policies are an option.
Is this not the basis of any “correct” internationalism?
Completely. And the eurozone is not constructed on that basis. Aren’t the stronger sub-economies now directly or indirectly promoting regressive austerity measures on the weaker ones? ‘Looking after your own country first’ is what Germany and France are doing right now – that is something (possibly a tribalist/localist inevitability) that needs to moderated by an understanding of the needs of the supranational whole.
Well I suppose they may argue that Ireland’s austerity package is in the best interests of the entire Eurozone. Which may or may not be true, but I think the French and Germans probably think it is (though doubtless they weigh themselves quite heavily when making the calculation). Their question would be what alternative is there?
Squeeze the creditors at least as much as the debtors.
I’d agree with that. The lenders who bet on the Irish bubble deserve to take a hefty haircut – probably some of them should get wiped out. The only problem would be the effect it would have on other troubled nations debt. I have no crystal ball but I imagine the market for, say, Portugese debt could well collapse.
The real (or one of the many) disgrace here was the ‘no bailout, no default, no exit’ policy. By failing to establish a credible restructuring system at the outset the architects of the EMU set up this problem. It was such a terrible policy: a moral hazard machine combined with a taxpayer screwing device at the end. All because of the hubris of the EU in believing they could ignore history and prevent sovereign defaults.
Precisely. And so reform of capital flow should be at the heart of solving this problem.
Incidentally, three years ago I argued in an article for Socialist Appeal that:
“One common criticism of the practicality of a common Caribbean market is the differences in exchange rates between CARICOM member states making the plan improbable. Bruce Golding expressed fears that CARICOM had only redistributed poverty – wiping out industries such as biscuit manufacturing in Trinidad. Governments are needed to instigate the legislative changes that are required in the economy.”
I stand by most of this with regards to any common market (EU, ALBA, CARICOM etc) – free trade wants to distribute wealth but almost always fails, it can almost certainly guarantee the redistribution of poverty however.
Reforming capital flows yes, I think we can all agree to that. The difficulty is, of course, how.
*nations’*
If you want a good laugh on the topic (goodness knows we need one): http://blogs.telegraph.co.uk/news/peteroborne/100064330/margaret-thatcher-knew-the-single-currency-would-devastate-europe/