Wednesday, July 1, 2015

The Appeal of the Euro

Despite the disasters the euro has wrought for Southern Europe in general and Greece in particular, there are still plenty of countries, from Eastern Europe to Iceland, that want to join.  I am very grateful to this article for making me understand why.  While belonging to the euro causes one set of problems, having a fluctuating currency causes others.  The grass is always greener on the other side of the fence.  People get frustrated with the problems they have and don't recognize the problems they are avoiding.

To a large country like the US, where most debts are internal, a fluctuating currency just means fluctuating import prices.  And we are large enough that imports don't make up all that much of our consumption, so currency fluctuations are at worst mildly inconvenient for most Americans.  In a country where a very large amount of what is consumed is imported, changes in import prices are more painful.  And to a country where many individuals and small businesses have foreign debt, a currency drop can mean a sudden, devastating surge in debt service costs for large segments of the population.  The article explains that this lead to political pressure in these countries to peg their currencies to the one most debt are in, with all the related dangers of an overvalued currency.

In Iceland, what was at work was apparently that even a highly successful adjustment to the worst financial crisis of all time is still necessarily painful.  A country as tiny as Iceland imports almost everything it uses.  As its currency plunged, prices of everything skyrocketed.  And foreign debts surged.

As for why they haven't learned anything from the experience of Southern Europe, well, they blame those lazy, profligate Southern Europeans and are confident they could never make the same mistakes.  I have seen quite a few articles (too lazy to look for them) commenting that Greece is not getting much sympathy from Eastern Europe, strapped though many countries there are.  In fact, it is a point of pride to many former Communist countries that they are not the center of the crisis and take it as evidence of their superior virtue.  More likely, being out of the euro and therefore able to devalue has been more at work, and if East European countries ever do get into the euro, they are most likely to learn that the hard way.

As for Iceland -- well, if Iceland had been in the euro, the EC would never have allowed it to stiff its foreign creditors, and it would be sentenced to be drained dry in perpetuity to repay them.

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