{"id":336302,"date":"2010-02-18T14:54:14","date_gmt":"2010-02-18T19:54:14","guid":{"rendered":"tag:http:\/\/www.economist.com,2009:21004893"},"modified":"2010-02-18T14:54:14","modified_gmt":"2010-02-18T19:54:14","slug":"emf-roundtable-membership-a-mistake","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/336302","title":{"rendered":"EMF roundtable: Membership a mistake"},"content":{"rendered":"

Peter Boone is chairman of Effective Intervention, a UK-based charity, at the Centre for Economic Performance at the London School of Economics. For an explanation of this roundtable, click here<\/a>.<\/em><\/p>\n

\"\"DANIEL GROS and Thomas Mayer\u2019s plan for a European Monetary Fund (EMF) is intriguing, although hardly likely to solve the inherent problems in the euro zone.<\/p>\n

Let\u2019s remember how the current crisis came about. From the foundation of the euro zone, until 2008, member nations experienced very different macroeconomic outcomes. Ireland and Spain experienced rapid growth with large private capital inflows, while managing prudent fiscal policies.  Greece ran budget deficits. They were each financed largely by European banks which themselves became perilously leveraged. Now all of Europe is held hostage to risk of sovereign defaults and banking sector collapse.<\/p>\n

If Greece, Ireland and Spain had flexible exchange rates, then no doubt the outcomes would have been very different. Greece would have suffered high yields on its drachma debt that would have kept its deficit in check. Spain and Ireland would have seen the peseta and punt appreciate, hence dampening exports and growth, while checking their housing booms. Exchange rates and interest rates would therefore have produced counter-cyclical and prudential responses. Instead, since they were members of a common currency zone, adjustments had to occur via prices and wages, so these countries experienced economic booms, their wage costs rose, and they gradually became less competitive over the decade.<\/p>\n

The key problem is that ECB policies were pro-cyclical rather than counter-cyclical for Europe\u2019s periphery. Jean-Claude Trichet\u2019s ECB drove up the euro just as the periphery started to collapse. Now Mr Trichet is calling for Irish, Greece, Portuguese and Spanish wages to be cut, and spending to be contracted, all because he is operating a monetary policy needed to keep core nations\u2019 inflation in check. As the IMF recently concluded for Portugal: Outlook bleak. Europe\u2019s periphery would have been far better served if they had tied their fates to the US dollar, or to the British pound, or to the Swedish krona, or to almost any other global currency throughout the last decade. <\/p>\n

So, if we are honest about it, the experience of the last ten years suggests most economists dramatically underestimated the costs that poorly suited monetary policies would pose for European financial stability and its smaller nations. The creation of a European Monetary Fund will not change this problem. It will instead even further weigh the balance of power in the euro zone towards the core countries. Under the proposed EMF, the core European countries, which control monetary policy in a manner that serves them best, would also effectively control procedures for bailing out or ejecting the periphery. Some less influential European economies will regularly be whipped up by inappropriate pro-cyclical monetary policies during booms, and then dragged over the coals by those core nation creditors during busts. The EMF does not seem good for taxpayers in the core nations, nor for the periphery. <\/p>\n

Perhaps the right conclusion is that a common currency zone is simply a bad idea for many of the euro zone members. With this conclusion, Mr Gros and Mr Mayer\u2019s suggestion that plans and mechanisms are needed to permit an orderly exit from the euro zone make complete sense.<\/p>\n","protected":false},"excerpt":{"rendered":"

Peter Boone is chairman of Effective Intervention, a UK-based charity, at the Centre for Economic Performance at the London School of Economics. For an explanation of this roundtable, click here. DANIEL GROS and Thomas Mayer\u2019s plan for a European Monetary Fund (EMF) is intriguing, although hardly likely to solve the inherent problems in the euro […]<\/p>\n","protected":false},"author":5820,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-336302","post","type-post","status-publish","format-standard","hentry","category-news"],"_links":{"self":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/336302","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/users\/5820"}],"replies":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/comments?post=336302"}],"version-history":[{"count":0,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/336302\/revisions"}],"wp:attachment":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/media?parent=336302"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/categories?post=336302"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/tags?post=336302"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}