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I suppose the argument goes something like this: for companies to be competitive, salaries cannot rise much faster than productivity, at least not in the long run. As long as all countries have their own currencies, any refusal to moderate wage growth will be dealt with automatically by the weakening of the currency. With this escape valve blocked by a common currency, painful wage deflation is the only way forward when wages have gone too high

And that would be true under a gold standard, because under a gold standard you cannot simply debase the entire currency system. Under a fiat common currency, however, the alternative policy stance of increasing demand and/or inflation in the low-inflation/low-wage growth economies is becomes viable.

Concluding that flexible labour markets are necessary reflects an anachronistic preference for deflation over inflation.

The - uh - "theory" behind the budget deficit requirement is that budget deficits are supposed to be exogenous, with causality running from the budget position to the price level and current accounts imbalance. Meanwhile in the real world, the usual case is that the current accounts are exogenous, and the causality runs from the current accounts imbalance to the need for public deficits to cover the resulting private sector demand shortfall.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Dec 23rd, 2010 at 02:38:04 AM EST
[ Parent ]
A fiat currency managed under Austrian economics "sound money" principles is like a gold standard. This is what the ECB does.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Thu Dec 23rd, 2010 at 03:02:50 AM EST
[ Parent ]
But it is important to understand that this is a policy choice, not a question of being in a currency union. A national economy managed under Austrian "sound money" principles will also be operating on a wannabe gold standard.

There is a conceptual difference between saying "the € project is a bad idea because a common currency forces us to run Austrian economic policy" and saying "the € project is dominated by Austrians, Austrians turn everything they touch to shit, therefore the € project is shit." Because getting rid of the € without getting rid of the Austrians won't get you better economic policy - it'll just turn your economy to shit courtesy of an IMF structural adjustment programme rather than an ECB intervention. And getting rid of the Austrians without getting rid of the € will solve the problem.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Dec 23rd, 2010 at 03:20:29 AM EST
[ Parent ]
To p/n a bit, it's a single currency you're talking about there. A common currency is a different beast.

As we discussed recently, there's nothing under Maastricht to stop a common currency being implemented tomorrow.

It might not be legal tender, but if the credit object is based on something valuable across borders, and uses the € only as a pricing reference (numeraire), there could be a pretty straightforward 'clearing union' solution available.

Eurozone considers new independent funding institution | Business | Deutsche Welle | 23.12.2010

A press report says several European countries including Germany are considering creating a new and independent funding institution to stabilize the euro. But Berlin denies that the plan is official policy. 

Germany is considering a "European stability, growth and investment fund," according to a government paper seen by the Sueddeutsche Zeitung daily. The newspaper said that French Finance Minister Christine Lagarde had called for the 16 eurozone countries to build a strong economic alliance that would explicitly exclude Britain.

Lagarde told the newspaper that London should not be allowed to "hold everyone else up." She also said this "economic government" would have to be consulted if any member state takes a decision that affects the others.

If such a fund were used to invest directly in renewable energy, energy savings and energy infrastructure both throughout and linked to Europe, then the outcome could be a common European currency based on a common 'Energy Pool'.

Then you fix the € as an absolute energy unit, impose a Gesellian charge on positive and negative common currency balances and there's the basis of a new European monetary system.

Domestic european currencies are another story.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Dec 23rd, 2010 at 03:30:38 PM EST
[ Parent ]
Germany is considering a "European stability, growth and investment fund," according to a government paper seen by the Sueddeutsche Zeitung daily.
If such a fund were used to invest directly in renewable energy, energy savings and energy infrastructure both throughout and linked to Europe, then
then we would live in a different universe.

Look here to see what they're actually talking about. There's no "investment" involved. Instead, there's talk of a fund "for the disciplining of member states" with "fatherly severity", and of "like with the IMF", "borrowers relinquishing sovereignty" over the objections of national parliaments. Oh, and borrowers would be required to pledge gold reserves as guarantees, so maybe they actually want to put the Euro on a gold standard.

I despair.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Fri Dec 24th, 2010 at 10:21:10 AM EST
[ Parent ]

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