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Part 2: The Single Currency Euro
Did the single currency had an effect on the crisis in European countries?
If we reason with a traditional type mode in the sense of old European models, we can
say that the Euro did accentuated the crisis. For example for Italy, a lot of economists
say this, if the Euro was not in place, Italy could have devalued the Lira and took advantage
of it on the international markets. That had a positive effect increasing exports etc.
As an example, often is mentioned the crisis of the European Monetary System in 1992 when
Italy was forced to get out of it. In few days devalued of around 20-25% and had a positive
effect on exports etc. From this point of view, the reasoning goes that if the single
currency was not there, things could have worked in that way.
However, the main difficulties in comparing such a reasoning today to that in 1992, more
than 20 years ago, is that is misleading. The reality of the world economy has been
radically transformed, it is difficult to think that devaluing your currency you would
get the benefits you were getting 20 years ago. The reason is simple, in the sense that
the world economy today has actors that 20 years ago were not important: China , India,
Brasil etc all these big emerging economies change totally the situation of the world
economy. Now, the devaluation per se does not make Italian goods more competitive than
the Chinese, at prices and costs the Chinese economy exports. China to take one example
but is the same for others.
It is also true that, as many say, the Euro had allowed to a country such Italy, or other
relatively weaker countries in Europe, to defend better against speculative attacks.
It is one thing to attack the Lira or the Dracma, the other to attack the Euro on speculative
markets.
The real problem of the single currency hence is not if it worsened or favored the defences
against the crisis, but is the overall structure on which the Euro is based, On the first sight
of difficulties it showed all the limits of the fundamental concepts on which the whole
structure is based. At this historical juncture, many say, that the main problem of the single
currency is that there is no a federal state, a federal budget of significant importance
associated to the European Central bank or to the single currency. This choice to make
a single currency and do not think of a federal budget, the fiscal counterpart of the monetary
policy, rely on a concept of an economy that does not work. And today we have the dramatic
proofs that it does not work, despite the fact that 99% of the academia, perhaps, thinks
still that it works.
On the other side behind the idea of the creation of the European Monetary union there is an
important fact. The idea that given the context of the world economic, single countries alone
would have been much weaker in facing world competition. The idea of creating a big European
economic structure is not wrong per se, it is likely that is a right idea, the issue
is how to build this infrastructure. In other terms, the solution to the problems is not
to say : "basta with the single currency, let's exit the Euro and return to the Lira
or the Dracma". The solution would be to create a different Europe, based on political, social
and economic concept different to those that have been put in place. The exit strategy
is not to abandon the single currency, but to create a socio-economic reality totally
different with a single currency. However is this is politically feasible given the
current situation is to be seen.