Told them, that is, that disparate economies require different monetary policy to meet the different reactions to economic stimuli:
Is Spain at risk of becoming the eurozone’s next crisis in the making? Angela Merkel’s government fears it could be.
Berlin is said to be growing increasingly concerned that Spain rather than Italy or Greece is now the region’s potential tinderbox.
German officials are worried the economic damage and the political turmoil caused by the country’s Covid setbacks could ripple beyond its borders, according to Bloomberg.
Its virus response has been beset by bitter political infighting, unemployment is rising fast and business surveys suggest the recovery is now back in reverse gear. The capital, Madrid, is facing new restrictions this week that will bring in hospitality curfews and limit gatherings, erupting old faultlines between central and regional governments.
It doesn’t, in fact, matter what those economic stimuli are. Nor whether they are uniform across all the disparate economies yet they react in different ways – as, say, fixed rate and floating rate mortgage systems will in response to a change in interest rates – or whether they face different stimuli just because.
Get a monetary area, a single currency zone, large enough and there will be areas, portions, which react differently at the same time. And those different reactions require different monetary policy to deal with them.
Different monetary policy being just what you cannot have in a single currency zone.
If those Southern countries – Greece, clearly, Italy in slow motion, now Spain – keep having these problems as a result of the system then perhaps it’s the system itself at fault?
Gosh, wouldn’t it be wonderful if we had an area of scientific study which told us about this stuff?
Of course, we do, Robert Mundell’s work on optimal currency areas. Exactly the stuff that the builders of the eurozone insisted upon ignoring for political reasons as they did the building of the disaster.
The proof of all of this not being the current problems. Rather, the property booms in both Spain and Ireland back in the 00s. Then it was Germany that needed the low interest rates as the Hartz labour market reforms hadn’t taken hold as yet. Spain and Ireland needed higher rates to calm the economies. But interest rates in a single currency area will be set for the bulk of the economy, not for the needs of any one part of it nor the periphery. So, interest rates were a tad high for Germany, given its portion of that whole and influence upon the average, and vastly too low for Ireland and Spain.
So, property booms followed, inevitably, by busts. That the euro is a pernicious stupidity was proven 15 years ago that is.
With the current problems, well, if only someone had told them, eh? Or, perhaps, if only they’d listened.
BTW, anyone who is really bored can go look at the archives of sci.econ from the late 1990s. Where they will find my first scribblings upon this ‘ere internet. Which warned of the dangers of a currency area too large to be optimal using the then proposed euro as the type exemplar…..