Tuesday, 26 April 2011

Matthew Lynn, Greece, The €uro, and the Sovereign Debt Crisis

I nearly stopped reading this book on page 3. It felt like it was being addressed to American readers and therefore taking into account their woeful ignorance of history and current affairs (witness the repeated gaffes of Republican presidential hopefuls). And the prose was pretty wooden. But I knew it was a book which would challenge some of my assumptions and beliefs, so I kept going. It gets a lot better as it goes on and I finished the whole book.

Lynn writes from a generally monetarist and fiscal conservative position: they're bust, we're bust, we're all bust. Except for Germany, the real and only home of Prudence.

He reckons the €uro was doomed from the moment the EU agreed to bail out Greece, creating more debt as if it would solve the problem of old debt. If Greece had not abided by the terms of the Growth and Stability pact, simply continuing its profligate path, how would throwing money at it alter that? I felt at the time(2010) that Greece should have been allowed to go bust and this book does nothing to challenge that as a sensible view.

Indeed, a year on in 2011, everywhere I read (including The Economist) is talking about the good sense of an "orderly default". There is no possible future in which Greece will be able to pay its debts, so why not recognise that now instead of throwing good money at the riot police?

Interestingly, whereas most fiscal conservatives are unconcerned by a bit of deflation, Lynn's best arguments are designed to show that the €urozone has now trapped itself within deflationary policies. Because no individual country can devalue, every country in even a bit of trouble is pushed towards exaggerated austerity and that deflationary pressure works it way round the whole monetary area.

Quite persuasively, he argues the case for Greece's exit from the €urozone. It would allow Greece's currency to devalue, just as the UK has been able to devalue against the €uro. When the €uro was introduced, I decided to dual-price my stock. I still have stickers which say "£10 or 16€". Then I realised it wouldn't work, so I started pricing just in €uros - a decision which has worked in my favour. Today, £10 is under 13 €. If you want 16€ worth of stuff now, and want to pay in sterling, it will cost you £14.16. In other words, the pound has devalued 40% against the €uro in under a decade. No wonder Booze Cruises are a thing of the past.

But my mistake was to think of the €uro simply as a medium of exchange, in which case, one currency rather than 500 is a no-brainer. Lynn does show how the €uro was not thought through beyond this level, when in fact a common currency will only work if there are fairly standardised (and healthy) fiscal policies throughout the currency area. Greece should never have been admitted to the €urozone in the first place; it was a basket case and the €uro of itself could do nothing to change that. Except indirectly: it was the money markets which downgraded Greek public debt just because they could see that Greek governments did not give a toss about the terms of the Growth and Stability pact. Unable to devalue, Greece could not escape the judgment of the markets.

Something I did not know: in the build-up discussions on the common currency, the UK suggested a system of dual or parallel currencies: each country keeps its own money (and central bank) but alongside these there is a common currency. You take your pick (just as you do when offered dual priced goods). If the common currency works well, then its advantages as a medium of exchange will progressively reduce the role of national currencies. It will grow organically towards being the people's choice. This is an interesting idea and one which could be revived.

No comments:

Post a Comment