IMHO, to really make a common currency like the Euro work, you'd need not only
a common fiscal authority but probably also a common political authority.
Under the EU, you have neither of these. What you have is a bunch of
governments using a common currency trying to keep their countries afloat under
adverse economic circumstances, several perhaps succeeding (we'll see) and
others obviously failing. It probably won't be long before the countries that
are coping (Germany, France) get tired of bailing out those that are failing.
I don't think it'll be too long before the deutsche mark, the franc, the
guilder, the escudo and the drachma are back in circulation. The EU was a nice
but very incomplete dream.
Ed
----- Original Message -----
From: Keith Hudson
To: RE-DESIGNING WORK, INCOME DISTRIBUTION,EDUCATION
Sent: Friday, September 16, 2011 4:41 AM
Subject: Re: [Futurework] Euro strategy for the EU?
Pete,
Your proposal of a Euro-Jr is interesting and it has some merit but, other
things being equal, it would work no better than the existing Euro (except for
one possibility).
The conventional 20th and 21st century (fiat) currency of any government
exists only by how much confidence private people or institutions have that
they will be paid back (in real value) if they lend money to the government if
its expenditures continue to exceed its existing ability to tax. If they have
no confidence in the future competence of a government then they won't lend --
that is, buy government bonds. If they have full confidence, then they might
buy bonds with little or no risk premium above about a 2% annual return (that
is, that the normal level of compensation people require for not investing it
elsewhere or hoarding it for emergencies with complete security under the
mattress.) If potential investors think that the future financial conduct of a
government is risky then they will demand higher annual returns on their bonds
according to the level of risk they perceive.
When the Eurozone started 11 years ago with such mutual back-slapping bombast
(in effect, "we're going to challenge the dollar!"), then private investors,
banks, pension funds and other naive institutions were bamboozled into thinking
that the initial value of the Euro would be maintained by prudent financial
control. However, they didn't realize that, despite all the wonderful
aspirations, no Eurozone government had actually been set up with the ability
to tax. There was a money-printing central bank all right -- the ECB -- but
that's only the half of it. There was no taxation system or budgetary control
over the Eurozone territory. Reduced to essentials, there were only voluntary
contributions by prosperous governments (and their electorates) such as Germany
to the less prosperous countries such as Greece. Thus, initially, when
investors bought Eurobonds issued by Greece they thought they would have the
same potential value as Eurobonds issued by Germany. Because Germany and
Finland and one or two other countries have become increasingly reluctant to be
so charitable in the future, investors now know otherwise about Eurobonds.
Those who buy Greek Eurobonds now require a return of 30% per annum (and still
rising) due to the risk factor of a culture and economy that has been enticed
into becoming charity-dependent over the past 11 years. Obviously, this can't
continue for much longer.
If, however, Greece and other similar countries such as Ireland, Spain,
Portugal and Italy, were to form a Euro-Jr-zone then exactly the same
situation would apply. There would be a relatively higher level of prosperity
in one of them, but it would be distinctly lower than that of the Eurozone as a
whole and it would thus be most unlikely ever start to be charitable to the
others. Unless the Euro-Jrp-zone also had a unitary taxation and budgetary
system (that is, imposed by a new central government), the Euro-Jnr would have
no more chance of surviving than the Euro.
The Eurozone is now debating whether to issue a new type of Eurobond (that
is, a real bond this time) but this would require a new pan-Euro government
with the ability to tax as well -- so that investors would have confidence in
lending with sensibly low rates of return. So far, the political and the civil
service Eurozone cliques have not dared mention this to their electorates. The
consensus of objective observers so far is that the possibility of persuading
17 different electorates agreeing to yield their sovereignty to one new
taxation authority is pretty well zero.
Ironically, the central banks of America, England, Japan, Switzerland and the
ECB itself (!) have decided to guarantee the survival of the Eurozone until the
end of the year. The irony is that the governments of all of them, except
Switzerland (almost the smallest country in Europe!), are already so deeply in
debt themselves that any realistic person would say that they have little
prospect of ever paying their debts off except with several years of hard
grind. The only non-bankrupt government with any large amount of surplus money,
China (and hitherto by far the largest investor in Eurobonds of various sorts),
hasn't been invited in this rescue operation. It's prepared to help further but
only if the Eurozone "gets its house in order" as one of its spokesmen said
yesterday.
The possibility I previously hinted at is that if the potential Euro-Jr-zone
countries were to form a competent taxation/budgeting government then the
Euro-Jr currency could survive. Indeed, if it also needed a helping hand, then
China would probably help with initial loans. The Euro-Jr-zone could survive
even if the Eurozone didn't. Now there's a wonder!
Keith
At 03:28 16/09/2011, you wrote:
I've been musing about the arc of the currency issues evolving
in the EU, and given the recent insistence from key leaders that
Greece (et al, presumably) should remain in the EU, I wonder
if the solution will be to create a new currency, a sort of
euro-junior, for use in a tier of EU states to be relegated as
the EU farm league. This currency would be able to adjust
against the euro, thereby provide relief for failed aspirants
to EU financial discipline. The EU-cadet states would then retain
many EU benefits, while the number of currencies could remain low,
however many states found themselves sent down from the majors
due to a prolonged slump, thus keeping the overall bookkeeping
relatively simple. The currency would persist regardless of
the comings and goings of members of the B-team.
This strategy could provide a flexibility to the financial
configuration, allowing both a breathing space, taking away the
urgency for an all encompassing solution, and providing room
for playing about with various mechanisms to improve the overall
EU monetary system.
-Pete
_______________________________________________
Futurework mailing list
[email protected]
https://lists.uwaterloo.ca/mailman/listinfo/futurework
Keith Hudson, Saltford, England http://allisstatus.wordpress.com/2012/08/
------------------------------------------------------------------------------
_______________________________________________
Futurework mailing list
[email protected]
https://lists.uwaterloo.ca/mailman/listinfo/futurework
_______________________________________________
Futurework mailing list
[email protected]
https://lists.uwaterloo.ca/mailman/listinfo/futurework
