Zero Hedge tends to be where economic misunderstandings go for a last hurrah. They’ve managed to outdo themselves this time around, insisting that the very problem with the euro is the reason for its existence. Something which shows a distinct lack of understanding of the underlying economics here, that of optimal currency areas.
By the way, the correct answer to the euro is “No.” The more technical one is Hell No.
What Zero Hedge have done is look at the manner in which various of the European currencies devalued over time against the Deutsche Mark. Then insisted that the euro had to come into being in order to prevent such depreciations over time. That the euro doesn’t allow depreciations against the DMark being the actual problem with the euro itself. So, yes, they have identified the problem as the justification. Which is some going really.
As presented in the chart below – which shows the performance for each of the EU12 countries against the German DEM in every decade from the 1950s to the start of the Euro in 1999 – apart from a small revaluation of core countries in the 1990s, every country devalued to Germany in every decade between the 1950s and the start of the Euro. Said otherwise, the Deutsche Mark appreciated in value against all of its European peers for 5 consecutive decades, a condition which if left unchanged, would have led to an economic and trade crisis.
Well, no. Even, Hell No.
As Paul Krugman has pointed out:
We’re all agreed that Greece needed to reduce its wages and other costs relative to those of the euro area core. This could have happened quickly, with no need for high unemployment, if Greece had had an independent currency to devalue — as happened in Iceland. Given membership in the euro area, however, Greece had to go through a period of relatively high unemployment depressing wage growth.
The point being that, as optimal currency area theory insists, different economies do indeed operate differently. The further apart the manner in which any two do operate then the greater the need to have different currencies. Partly so as to enable different monetary policy given different economic conditions, partly so as to allow devaluation. Which is the change in just the one external price rather than having to go through that grind of an internal devaluation. As Krugman points out, the lack of that ability is what has caused the disaster in Greece. Sure, spending too much, borrowing too much, they were causes. But once the crisis came a devaluation would have allowed recovery without 25% unemployment, 50% youth unemployment. You know, a worse – and longer – out turn than the Great Depression in the US. Something I think we’d agree is and was an economic and trade crisis?
The euro and its straitjacket has been the cause of the Irish and Spanish property booms, their subsequent collapses, the Greek debacle, Italy’s entire lack of GDP growth for two decades and much more besides. At which point, well, what do we do about Zero Hedge’s claim that the euro was necessary to avoid an economic and trade crisis?