Should we short the euro? Nobel prize winner Joseph E. Stiglitz does not give us any specific investment advise, but he does a very credible job in this new highly recommended book of explaining why the euro isn’t working, why other single currencies, like the USD seem to be working, and what can be done to save the euro.
The problem with a common interest and exchange rate is simple, according to Mr. Stiglitz. When different countries are in different situations, they ideally want different interest rates to maintain macroeconomic balance and different exchange rates to attain a balance of trade. The founders of the Eurozone may have realized this, but they failed to allow for these differences. Instead, they hoped for convergence. Stiglilitz’s Part II titled “Flawed From The Start” explains how criteria-convergence rules were set up to facilitate this. Governments wishing to join the union had to limit their deficits to less than 3% of GDP, and their debts to less than 60% of GDP. All the countries agreed. The poor performance of the euro are documented in standard metrics both during and before the world financial crises of 2008. Plus there were no strong countercyclical policies in place to ensure a quick restoration. In addition to physical capital destruction, societal capital has also suffered. Take Greece, where Greek debts caused the Troika to force the tearing up of the Greek social contract where pensions are being cut to below subsistence levels inflicting consequences on Greek society as well as their economy. If they were not tied to the euro, the Greeks could have devalued their currency, encouraging tourism and other trade. The Greek banks could also have lowered interest rates to encourage production, in contrast to the ECB, which raised rates in 2011. Why is single currency able to work in the US in spite of marked differences among the states and long standing distinction between Wall St. and Main St.
4 Comments
4/17/2017 04:03:43 am
This post is very informative. I've learned a lot of things about the Euro. We just see Euro as a simple currency. We don't know the meaning behind this currency. It feels great to add anoter bunch of knowledge in our minds. It is very fulfilling.
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7/3/2017 07:24:55 pm
Living in the United States of America, I thought that the economy of European countries is way better than ours. But learning a lot from your post, I saw how blessed we are as American people. We should be thankful enough because our Dollar currency is working good compared to the Euro domain. It is quite fulfilling to know that we have this advantage over the strong nations in Europe.
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1/29/2018 11:03:39 pm
I thought that Euro is doing incredibly well but based on your article Euro is now struggling. Unlike in the United States there is a big difference because even though there are many states, the main currency is United States Dollar. I hope that the government of Europe will do something about it. It is difficult to see your money is losing value. Asking for help on other countries and advises will not harm the country. I hope that the government will think of ways how to deal with the problem.
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ashley
8/3/2017 08:05:16 pm
good to hear?
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