Posted by: CS | February 20, 2012

Why the Eurozone Is About to Break Up

Image source: Euro Failure is Systemic.

Mish has a piece today entitled “Why Greece Must Exit the Eurozone.” This states exactly what I said a while back, which confirms what a smart fellow Mish is.

Mish’s article includes a quote listing the requirements for a successful monetary union as spelled out by Canadian Nobel Prize winning economist, Robert Mundell: requirements that, as we noted earlier, the Eurozone entirely lacks.

In fact, rather than the Euro monetary straightjacket, Europe would be better off with a multiplicity of currencies, as Canadian author Jane Jacobs explained in various works on the economy of cities. With a free-floating currency a country, region or city automatically maintains a currency exchange rate that under most circumstances insures balanced trade and full employment. If productivity falls relative to that of trading partners, the currency falls, achieving in effect, a reduction in real wages without modification in nominal wages. Conversely, if productivity rises relative to that of trading partners the currency exchange rate rises, thus achieving an increase in real wages without modification in nominal wages.

Because labor productivity varies not only country by country but region by region and city by city, the greater the number of free floating currencies within a trading area the greater the precision with which real wages are adjusted to productivity and unemployment is minimized.

An alternative to the complication of multiple currencies within a trade zone would be the implementation of automatic wage adjustments according to productivity. Because productivity is difficult to measure accurately and expeditiously, unemployment would be used as a proxy for the inverse of productivity. Thus as unemployment in any region increased, wages would be adjusted downward on a year-to-year, or month-to-month basis. Conversely, as the labor market tightened, wages would be adjusted upward.

A scheme to achieve regional adjustment in wages according to productivity within a currency union such as just outlined would solve the Eurozone crisis, and incidentally, win CanSpeccy the Nobel Prize for economics. But the idea is undoubtedly far above the heads of Merkozy and co, or most economists,  so the Eurozone break-up will proceed — on March 23, so many people are saying.

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Responses

  1. Good point: "Because labor productivity varies not only country by country but region by region and city by city, the greater the number of free floating currencies within a trading area the greater the precision with which real wages are adjusted to productivity and unemployment is minimized."

  2. Bad point"An alternative to the complication of multiple currencies within a trade zone would be the implementation of automatic wage adjustments according to productivity. Because productivity is difficult to measure accurately and expeditiously, unemployment would be used as a proxy for the inverse of productivity. Thus as unemployment in any region increased, wages would be adjusted downward on a year-to-year, or month-to-month basis. Conversely, as the labor market tightened, wages would be adjusted upward."Your other point is much better and very different from this one, because in that case as the currency was devalued the equilibrium in prices would stay even in the country… with this point the reduction in wages brings forth: resentment from the reduced people, recession, probable increase in internal prices to make up for the resulting recession from wage reduction as the medium and small businesses striving to make ends and even profit meet, (see Greece now), widening of income gaps… etc and enough?Having lived in Argentina maybe one of the champions in inflation and devaluation, even if it is not advisable to have inflations and resulting devaluations, the equilibrium inside the country is better maintained with that proposition.I do like your web page… will link to it more often

  3. It is generally acknowledged that wages are "sticky downward," as Maynard Keynes remarked, although periodic small adjustments either up or down in the context of a scheme to maintain full employment could more acceptable.


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