Paul Krugman: Monetary Union experience – Ireland versus Nevada


From The New York Times – Can Europe Be Saved?:

The tragedy of the Euromess is that the creation of the euro was supposed to be the finest moment in a grand and noble undertaking: the generations-long effort to bring peace, democracy and shared prosperity to a once and frequently war-torn continent. But the architects of the euro, caught up in their project’s sweep and romance, chose to ignore the mundane difficulties a shared currency would predictably encounter — to ignore warnings, which were issued right from the beginning, that Europe lacked the institutions needed to make a common currency workable. Instead, they engaged in magical thinking, acting as if the nobility of their mission transcended such concerns…

[Interesting factoid: the original story of The Wizard of Oz may actually have been a fable about the ill-effects of the American unitary, gold-monetary union – in opposition to the bi-metallic movement for “Free Silver” by the Western States such as Nevada…]

…there are obviously benefits from a currency union. It’s just that there’s a downside, too: by giving up its own currency, a country also gives up economic flexibility.

Imagine that you’re a country that… recently saw wages and prices driven up by a housing boom, which then went bust. Now you need to get those costs back down. But getting wages and prices to fall is tough: nobody wants to be the first to take a pay cut, especially without some assurance that prices will come down, too…

If you still have your own currency, however, you wouldn’t have to go through the protracted pain of cutting wages: you could just devalue your currency — reduce its value in terms of other currencies — and you would effect a de facto wage cut.

Won’t workers reject de facto wage cuts via devaluation just as much as explicit cuts in their paychecks? Historical experience says no. In the current crisis, it took Ireland two years of severe unemployment to achieve about a 5 percent reduction in average wages. But in 1993 a devaluation of the Irish punt brought an instant 10 percent reduction in Irish wages measured in German currency…

Read more.

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This entry was posted in Accountability, Bank Run, Bankers' Bailout, Debt Default/Restructuring, ECB/IMF, Economy, EU, Euro / Sovereign Money, Geopolitics, History, Housing Bubble, Ideology, ireland, Solutions, Superstate and tagged , , , , , , , , , , , , . Bookmark the permalink.

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