Was it worth it?

My simplistic take years ago on Euro in or out was "short term pain for long term gain". Now I have to wonder how much pain and how short term. The basic premise still stands I think.

This article points out the biggest flaw with the Euro: monetary policy. Because euro-zone nations have no control over this it is very easy for the ECB to set an interest rate which is too loose (leading to inflation), or too tight (leading to recession) for certain members. If all the nations were economic equals with an equal say over what the interest rate should be things would be fine. However, because Germany is a big and powerful powerbroker it gets the monetary policy it wants and needs while the Greeks have one forced on them. Unfortunately there is no easy way out of this problem.

"super-responsible ECB"?

That seems like a rather loaded characterization. Responsibility implies a monetary policy that always seeks to maximize long-term Euro-wide economic health. In my mind, this requires more than an extremely hawkish stance on inflation, with a bias towards monetary conditions in the core euro-zone (esp. Germany). This is especially true given that many economists have made the argument that a higher inflation target would do much to ease the adjustment of cross-border imbalances within the euro-zone that are no longer accommodated by a floating exchange rate.

Also, I wonder how useful the comparison with Denmark and Britain is, given that a country's level of development can have a significant effect on its potential growth rate. Personally, I would would like to see Greece compared to non-Eurozone, EU-member states with a similar level of economic development (at the start of the time period).

You can't borrow too much unless someone lends you too much. In circumstances when ECB policy, to accommodate conditions in the big guys, is too loose for smaller members, increased prudence in lending can mitigate the bad results of the discrepancy. Easier lending standards can help, though not so much, when circumstances are reversed.

Since you raise the parallel to America, it might be worth noting that we first tried the sort of loose federation that the EU has been for most of its existence.

It took us a decade before we figured out that the benefits of a little more central control outweighed the costs in lost state autonomy. And we had the great advantage in coming to that realization that we did not have a history of centuries of fighting between our states. Viewed objectively, the EU probably needs the same realization. But given the ingrained nationalism of its constituent nations (cf the significant British anti-EU sentiment), it seems unsurprising that it is going to take longer. With, necessarily, more pain due to the extended delay.

Forget Greece, in my considered opinion, the whole "euro-zone" concept was an exercise in abject futility from the inception & destined to collapse, sooner than later. What we are witnessing right now, is the beginning of the end of the euro.

Come chat with me, five years from now..

As a Greek citizen my reply to the question whether the Euro was worth it is an undoubted yes. The main reason for this is that having a real stable currency deprives politicians of the ability to print monopoly money to finance a bloated and corrupt public sector. It was unfortunate that markets went crazy for a number of years and allowed Greece to borrow too much to preserve and indeed expand the public sector, but the party was bound to finish. Now we are going to have a terrible few years but eventually the country will be a more efficient, better governed place.

One of the first measures the troika (EU, IMF, ECB) imposed was to have a maximum one hire in the public sector for every five retirements. This combined with massive privatizations that are now planned will both shrink the public sector and reduce the political strength of public sector employees.

The Euro is a good thing, but only if the members are all part of the same team and play by the same rules.

My apologies in advance to those who find my Peter Drucker quote below politically offensive. Underlying problems in Greece and many other developed nations is aging populations and social expectations for the retirement age. Lost decades have occurred in Japan, who had a retirement age of 55 in the 90's(considerable reforms have been executed) Similar economic and political issues are now occurring elsewhere in developed countries. While the EU would like to help thy neighbor, thy neighbor must also be willing to help themselves, mainly by working longer and loving it. This is a dilemma because should older people not exit the workforce, the required job growth doubles. The consequences of not working while living longer is that older people will either have to live on less, or hope for charity or taxes from future generations or neighbors. The U.S. now has over 20% of its population over age 65 still working and this percentage will grow for the next 20 years as the Baby Boomers join the ranks of the over 65 group.

“Demographics are the single most important factor that nobody pays attention to, and when they do pay attention, they miss the point. Everybody talks about the aging population in developed countries, which is the less important fact, because we know what to do about it. All you have to do is to raise the retirement age to 79, which is what it will be by 2010. How do I get that number? If you go by what corresponds to age 65 when Social Security began in 1936, the proper retirement age now is 79, given current life expectancy.”
“September 28, 1998″ “Peter Drucker Takes The Long View The original management guru shares his vision of the future with FORTUNE’s Brent Schlender..” 2011. Cable News Network. 27 June 2011 .

Unfortunately, it was political short-termism at the time of Greece's entry into the Eurozone that declared "convergence" existing within the zone. Currently running Greek pain should and would have been applied immediately upon entry, if the Eurobond, issued by a single European authority, had replaced all national bond-issuers. It proved the point that in European politics, thinks are initiated by a realistically unsustainable political decision, with the details been taken care of when "it" hits the fan. I am sorry to have to say that the implementation of the Euro project has vindicated Margaret Thather's position for the UK to stay away from the entire scheme. I remember John Major having written a book at the time, dealing with the smooth introduction of the EMU; it should be interesting if the Economist could get hold of it and critique it, in the light of today's developments.

what a magnificent load of economist style balls that article was.
let me phrase the problem more crudely and succinctly.... is it better to be crapped on once or have a truckload emptied over you.
Greece in the euro has managed to end up 12 year down the line with the truck emptied on them.
Would it not have been a great deal less painful for all involved not to have a much smaller load emptied much earlier over their heads?

Greece is in a bad shape, and only a resolve from the people will help. US needs to learn from the Greece situation, and see what they should not do to tail-spin into similar situation

More and more the Eurozone shows us that it doesnt have the skills and sophistication to pull the project off. Perhaps the ECB should employ more Chinese.

This was a necessary crisis. Greece was wedged between a second and first world economy. The mixture of operational modes that differed between the two was unsustainable. This was a pathological fracture.

Would Argentina be better or worse off today if it had not abandoned the US dollar peg in January 2002?

(Some of us at the time noted the irony of this happening in the very week the Euro notes were being dispensed at the banks and as change at the supermarkets.)

Currency unions – as with all organisations – represent a trade-off between competing efficiencies, in this case:

- the internal efficiency of being able to eliminate transaction costs associated with exchanging currencies; and

- the allocative efficiency of being able to adjust prices flexibility (through exchange rate movements) to respond to differing exogenous shocks.

What is the optimal trade-off? The Great Coase answered this question in 1937 for non-state organisations, and strongly hinted how it might apply to state organisations. That solution (a “polity market”, discussed in greater detail here) would tailor currency unions to the optimal sizes, shapes and durations according to market forces.

[The application of polity markets to currency unions was discussed briefly here during Ryan’s Summer Book Club back in July 2008. How times flies!! Is this really what we were doing three years ago as the world’s financial system was collapsing around us?]

Unfortunately for the long-suffering subjects of non-democratic Europe, the Euro was never intended to be optimal or to promote their well-being. It was designed by - and imposed for the benefit of - megalomaniac politicians who saw it as the vehicle by which they might write themselves into the history books as “Great Leaders” and “The Founding Fathers of the United States of Europe”.

But it must be a requirement of The Paternalist’s editorial committee that all bloggers contort themselves to give the benefit of the doubt to the Great And The Good. How else do explain this: “But for all the current pain, it's not obvious that the euro zone hasn't been a net plus for Greece.”

What about the People of Germany?? What about all the other Europeans who are now footing the bill?? The cost of the Euro debacle extends beyond just Greece. Even if “it's not obvious that the euro zone hasn't been a net plus for Greece” (a big "if"), that doesn’t even begin to address the costs incurred by other Europeans. It doesn’t even begin to address the permanent sacrificing of allocative efficiency - just as electronic monies were promising to bring down the transaction costs of currency exchange. A process that continues to gather pace. In addition to electronic state-sanctioned monies held on cash cards or Oyster cards, we now have altogether new monies such as BitCoin (discussed by Babbage here) with their own "foreign exchange" markets.

The German people in particular were prohibited from having any direct say on whether or not to join up to the cockamamie Euro scheme. Where people were given a choice – notably in Denmark and Sweden – they voted against it, despite the exhortations of the Great And The Good from both sides of politics. In Britain they would have voted against it if the politicians had dared to hold the referendum.

(It goes without saying that the Swiss – living in the world’s only Democracy - refuse to have anything to do with the anti-democratic EU. Even within their own federation they keep a firm grip on politicians who might try to centralise power for their own self-aggrandising purposes.)

At no point in the history of the EU member states have their Peoples ever been given the opportunity to freely choose the form of government they prefer for their country. At no point have they ever consented to having their lives ruined by self-serving megalomaniac politicians who enjoy a monopoly on legislative power.

Perhaps if the People had had their say - as in Sweden, as in Denmark, as in Britain if the politicians had dared, as in Switzerland - they might have been able to prevent this disaster.

But given The Economist’s unshakeable commitment to the doctrine of paternalistic government, that is something it can never, ever, ever, ever bring itself to contemplate.

Greece cannot adopt a thorough reform. Rather, it shouldn’t, or the imbalances in current account between the euro-area member states will be further aggravated. Compared to the neoclassical-Keynesian (or ‘mainstream’) reform as the plan A, it would be much better for the future of Greece and Europe if Greece declared a default and then introduced the Balcerowicz plan, the famous Austrian-Chicagoan method of shock therapy that enabled the economy of Poland to quickly regain credit in the early 1990s. But, this plan C is certainly an inferior alternative to the post-Keynesian method of fiscal union as the plan B if you think of the fate of present generations of households in Greece and the lucky present structure of the EU.

Following my comment in R.A.’s previous entry, I find the most significant necessary condition for the fiscal union, therefore, to be a standardised system of personal income tax in which the rates must be standardised throughout the area (preferably, including the non-euro area EU member states) so that a lot of households in Germany, the Netherlands, Luxembourg, Finland and Ireland(!) will have to pay heaps whereas most of the Greek, Spanish, Estonian and Slovak households will only have to pay peanuts if not olives while their incomes are assumed to be cheap.
http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-21062011-AP/EN/2-210... (Eurostat, *PDF*)

The increased revenue at Brussels should be redistributed among the member states of this new tax union along with the strictest possible system of public audit of the redistribution and the debt management of each state.

This form of redistribution can fill the gap of balance of current account between the surplus states and the deficit states, like the familiar system of tax money allocated to local governments within a state.

The state-level personal income tax will have to be reduced correspondingly to some extent as a matter of course, or the Germans, Dutch, Luxembourgers, Finns and Irish(!) will come over to Brussels to throw pieces of cheese and peats at the EU headquarter.

The standardised system of personal income tax is a radical step forward indeed, because it is the matter of choice between the two – whether they decide to adopt it or not: It is a black-or-white decision in the first place.

But, this is not a form of revolution albeit radical, because it contains no factor of eat and beat against foreign investors, which is always observable subsequent to every single revolution.

Once done, the next steps are certainly for the standardisation of other tax systems such as inheritance, capital gain, securities transaction, etc.

R.A. wrote: “What is certain, however, is that Greece's outlook should be better and would be better within a better euro zone. But you don't build good supranational institutions overnight. Today, Americans are celebrating a federation that, after 235 years, only mostly works and then only some of the time. Whether Greeks should be heartened or discouraged by the American experience is another very good question.”

I find this a very good remark, and I agree with him.

STEVE WALDMAN asks the burning question: Suppose that Greece had never adopted the Euro...

Suppose Greece had never talked with Goldman Sachs in order to misrepresent their debt?

A cute GDP chart.

How about a chart showing the total debts (Household Sector, Non-financial business, domestic financial sector, goverment sector)
of the 3 countries for the same period?

I "could" suck the equity out of my house and max out my credit cards for consumption spending.

It would show up as increased GDP on a cute chart.

Regards

In anticipation of an obvious objection . . .

. . . the fatal flaw of the Euroland was not the creation per se of a Land. It was the creation of a Land of sub-optimal size, shape and duration, determined not according to market forces operating through a well-designed polity market, but by rent-seeking political agents exercising monopoly legislative power outside the constraints of Democracy.

To quote the Great Coase (footnote 14, with some emphasis added):

"It is easy to see when the State takes over the direction on an industry that, in planning it, it is doing something which was previously done by the price mechanism. What is usually not realized is that any business man in organizing the relations between his departments is also doing something which could be organized through the price mechanism. . . . . The important difference between these two cases is that economic planning is imposed on industry while firms arise voluntarily because they represent a more efficient method of organizing production. In a competitive system, there is an 'optimum' amount of planning!"

The EU-wide monetary organisation (Euroland) was imposed by political agents for their own rent-seeking purposes, and inevitably it did not represent the Coasian "'optimum' amount of planning". A polity-market monetary organisation (or, more plausibly, competing monetary organisation operating within the market) would "arise voluntarily" in the same way that firms arise as non-state organisations.

As discussed previously, assuming the current pattern of European states, Europe might have - for example - a Germanic currency union, a Gallic one, an Iberian one, a Britannic one and a Scandinavian one, with other states retaining their own currencies. And these might be overlaid with various virtual currencies.

(Of course, under a polity market the current pattern of regional monopoly states would not be fixed over time because new states would "arise voluntarily" subject to the rules of incorporation administered by the meta-state.)

There is one simple answer to this question: Greece got in by fraud, so definitely yes, it should have stayed out of the euro. And if they were on the brink of default on their own, that wouldn't be that dangerous for the rest of Europe.

As A Young has said above the better comparison would have been with non euro Poland, Czech and Hungary. Denmark is a particularly weird choice as it is pegged to the euro and is de facto (if not de jure) a member of the eurozone.

The reason Poland, Czech and Hungary have emerged as Europe’s stellar winners in this crisis is not that their debt levels were so much lower than those of the PIIGS it is because their growth rates were so much better. Having their own currency boosted and continues to boost their external competitiveness, their trade balance and therefore their growth rates. The strength of the euro sealed the PIIG economies off from the largest period of global trade expansion in history and it simultaneously put a turbo charged boost under their imports and their debt accumulation. The Greeks had a $13 billion dollar annual trade deficit with just Germany in pre crisis ’08. She certainly didn’t have that before joining the euro. Spain’s annual trade deficit with Germany in ’08 was $33 billion (that is equivalent to 3% of Spanish GDP)!

We know that the fix is in when we see a relatively poor country suffer such extended periods of severe (and growing) trade deficits in its trade with a relatively rich country. The fix was the euro.

Lacking a shared fiscal policy, treasury and transfer union the euro had to achieve real economic convergence between its members if it were to survive. Instead it has provided both the means and the motor for increasing economic divergence within the eurozone.

Peer pressure imposed by euro membership may have improved Greek fiscal discipline but as we see the uber prescriptive terms of the current IMF/EU recovery plan it is seems to have been a very marginal benefit indeed – especially when weighed against the substantial defects of this arrangement.

The author's expectation that the Greeks will retain their improved GDP per capita levels vs. Britain and Denmark is wholly unreal given the vast extent (and servicing cost) of her debt, the collapse of both her private and public demand, the mass closure of her businesses, mass layoffs from the public sector and the exponential rise in her unemployment. Greece is being deliberately reengineered into a dust bowl economy . They are making a desert and calling it prosperity. This is a crime against humanity not tough euro love.

Greece would have been better off outside the euro – she certainly has no future within it…..

An interesting article, but a reference as to where the statistical data come from is obviously needed. Otherwise one gets reminded about creative statistics, which did not allow to the EU to properly scrutinize member states' economies for years.