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Problems of the Euro Zone

Wednesday, 29 August 2012 04:47

The Post had an interesting piece discussing the structural problems in the construction of the euro. While the basic points are largely accurate, it does misrepresent a couple of issues.

First, contrary to what the piece suggests, there was no general recognition at the time that the euro was created that Germany's economy would somehow dominate the euro zone. In fact, in the 90s and even at the start of the last decade, Germany's economy was viewed as seriously troubled. For example, Adam Posen, a prominent economist who now sits on the Bank of England's monetary policy committee worried in 2002 that Germany was turning Japanese (that wasn't a compliment).

The fact that Germany's economy did turn out to dominate the euro zone was a major surprise. This shows the ability of economies to turn around quickly or at least in ways that are unexpected by economists (i.e. the people who are the expert sources for these pieces).

The other major misrepresentation or understatement in the piece was that the euro's founders did not anticipate that the European Central Bank (ECB) would be run by ungodly incompetent people. The ECB ignored the growth of enormous housing bubbles in Spain and Ireland that were leading to enormous imbalances in the euro zone economies. It was 100 percent predictable that these bubbles would collapse and lead to enormous adjustment problems when they did. However the ECB opted to ignore their growth.

Remarkably, even today it takes zero responsibility for the failure to recognize the dangers posed by these bubbles and the consequences from their collapse. Any currency needs competent people to manage its central bank. If these cannot be found (a skills mismatch?), then the currency will face serious problems.  

Comments (2)Add Comment
You Always Say That!
written by Frankly Curious, August 29, 2012 4:27
I agree with you, but I don't see how the ECB is any different from any other central bank. Wasn't it predictable that the ECB would be "run by ungodly incompetent people"? Imagine how different things would have been if Alan Greenspan had run the ECB!
The Euro is the problem
written by Calgacus, August 31, 2012 7:46
the euro's founders did not anticipate that the European Central Bank (ECB) would be run by ungodly incompetent people.

The Euro's founders WERE ungodly incompetent people - or people whose plan was to create an endless Great Depression while siphoning off wealth to well-positioned elites.

The Euro cannot work as designed. The measures the ECB & its founding treaties make illegitimate are exactly the ones which are necessary for it to survive.

The ECB is VERY different from any other central bank - the difference is that it issues the only money in the Eurozone, at least in light of the colossal ignorance of economics in Europe. The Euro states demonetized their debt when they joined the Euro; before then, for practical purposes their debt was money.

The people running the ECB have been outstandingly stupid, criminal or insane, even by the very low standards of other central banks. But the primary difference is the workable institutions of the US, the UK, Canada, Japan etc, and the unworkable doomsday machine called the Euro.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.