Tuesday, October 04, 2011

Common sense on the Euro from Bangkok!

The Bangkok Post has some advice from an economist who for sixteen years has been warning about the folly of the common currency:

This crisis seems to have been inevitable. I, and most of the rest of the economics profession, have argued against the Euro (in its current form, with its current membership) for 16 years.

So the Euro should not exist. However, the cost of breaking it up is hideous. Rough calculations suggest the Greek economy would halve in size if Greece were to exit the Euro zone. That is a far greater cost than anything Asia experienced in the 1997-98 crisis

If Germany were to try to exit, it would cost it a quarter of the German economy.

There are also political costs. The economic damage (and unemployment) would be the worst since the 1930s. In extremis, that economic pain could provoke anything from widespread social unrest to military government or even civil war.

This leaves Europe trying to work out how to make the Euro work. The solution must involve some kind of fiscal confederation. No monetary union has ever survived without a fiscal union alongside it.

Unfortunately, the politics of fiscal integration are not playing out smoothly. Euro-area politics sometimes seems akin to the politics of the playground. Politicians seem inclined to yell "shan't" whenever economists ask them to play nicely with one another.

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