It’s always a rare moment when politicians agree, especially when they’re from polar opposite sides of the ideological spectrum. Economics is no different, because economists from vastly different schools of thought often disagree on very basic theories. For instance, something as straightforward as identifying what causes economic recessions is a big point of controversy for economists. Surprisingly, economists who would otherwise be at each other’s throats agree on one thing–the Euro currency is in a bind. In the world of economics, this would be the political equivalent of Donald Trump and Bernie Sanders agreeing on immigration.
The Euro is the official currency in 19 countries that belong to the European Union. Whether you’re buying a croissant in France, a strudel in Austria, or Port Wine in Portugal, you’ll be using the Euro. Some countries in the European Union, such as the United Kingdom, have opted out of adopting the currency. More than 300 million people in the largest economic zone on the planet are tethered to the Euro.
Prominent figures in economics as diverse as Milton Friedman (the father of modern free-market economics, who died in 2006) and Paul Krugman (an unapologetically liberal economist) take issue with the Euro for the same reason. Having one currency for very dissimilar countries is problematic for many reasons.
Some look to the difference in income levels as a starting point. For instance Luxembourg (per capita income $110k) and Latvia (per capita income 15k) are bound to the same monetary policy. In the United States, we have smaller, but still significant differences in per capita income (consider two states with the biggest divergence in per capita income: Delaware 61k and Mississippi 29k). But here in America, we have a fully functioning political union that can make up for economic differences with subsidies and transfers. In Europe, despite the unprecedented political cooperation that has come with the European Union, individual countries still largely control their own fiscal affairs. The amount of subsidization that would have to take place to compensate for economic differences is politically unfeasible in an area with so many different ethnicities and languages.
Perhaps the most troublesome part of the Euro is that countries have given up the possibility of having their own exchange rate. Friedman identified exchange rates “as mechanisms by which they could adjust to shocks.” In plain English, that means that countries could weaken their own currency to spur demand. For massive tourist destinations like France, Spain, Italy, Portugal and Greece, currency devaluation would be an easy way to fuel a recovery. Instead, these countries are still mired in crisis-like conditions. As Krugman has said,“by joining the Eurozone they put themselves into an economic straitjacket.”
Giving up the ability to have their own currency has been especially damning for southern European countries. It’s an inconvenient truth that many countries in the Eurozone would already be in full recovery mode if they had their own currencies. Instead, a whole lost generation of dispossessed and discouraged young people has been ignored in favor of a failed political experiment. It’s a living nightmare for millions, as nearly half of Spain and Greece’s youth is unemployed. Keeping half of your should-be-working youth idle for the better part of a decade is a toxic cocktail for any country. You would think policy makers would quickly act to bring down the unemployment rate, but that simply hasn’t happened. At the helm of monetary policy in Europe is Germany. In that country, youth unemployment is only 7%.
It doesn’t take a Nobel Prize winning economist to realize who the winners and losers are in the Euro currency union. Because Germany is a manufacturing powerhouse, the common currency union means they get to paid for their goods in their own currency. That’s been a boon for the German economy which has been able to weather the recession by selling its products to the rest of the European Union countries. There’s a reason why Germany has been ultra-conservative with their Eurozone wide monetary policy–they simply don’t need stimulus. If Germany were enduring recession-like conditions like Greece, it’s likely they would have a very different strategy when formulating their monetary policy.
The Euro was doomed from the start, it just took a crisis to demonstrate the impotence of such a union during difficult times. Countries are simply taking too long to recover under the present currency union. Europeans in ailing countries can only take so much before they lose all hope.
Economist John Maynard Keynes once famously said, “in the long-run, we’re all dead.” Many countries should ditch the Euro, inflate their currencies and move on. For the countries who are in the European Union and haven’t adopted the Euro, it would be wise to opt-out of such madness.
Photo by Images_of_Money
David is the Editor of Bold. He's especially passionate about millennial economic empowerment. A former local news reporter, David is originally from the Little Havana area in Miami, and later became a pioneer resident of the Disney-inspired town of Celebration, Florida. David holds a Master’s in Public Policy from the Harvard Kennedy School.