The Euro – The Beginning, the Middle...and the End?

Institute of Economic Affairs Monographs, Hobart Paperback 39, 2013

Institute of Economic Affairs Monographs, 2013

216 Pages Posted: 23 May 2013 Last revised: 29 Aug 2013

Philip Booth

City University London - Sir John Cass Business School

Francisco Cabrillo Rodríguez

Complutense University of Madrid - Industrial and Financial Analysis Institute (IAIF)

Juan Enrique Castaneda Sr.

University of Buckingham

John Chown

Independent

Jamie Dannhauser

Lombard Street Research

Kevin Dowd

Nottingham University Business School (NUBS)

Katja Hengstermann

Independent

Bodo Herzog

Reutlingen University - ESB Business School

Andrew Lilico

Europe Economics

Patrick Minford

Cardiff University Business School; Centre for Economic Policy Research (CEPR)

Neil Record

Record Currency Management Limited

Pedro Schwartz

Universidad CEU San Pablo

Date Written: April 12, 2013

Abstract

The UK decided not to join the euro on economic grounds. This was a decision which met with approval from the vast majority of UK liberal economists and which has been proved right by the course of events. Indeed, even the major supposed benefit of the euro – reduced currency volatility – is questionable when the volatility of sterling and the euro against other world currencies is considered.

The euro zone – even without the UK – was not an optimal currency area. Many proponents of the euro thought that it would evolve into an optimal currency area through structural reform and economic convergence. This has not happened in practice.

Differences in financial systems between euro zone members meant that their economies responded very differently to global economic shocks and to the ECB’s monetary policy operations. This helped to create the financial imbalances that became unsustainable.

With the possible exception of Ireland, product and labour markets in euro zone members are too rigid to respond adequately to economic shocks. The result has been high unemployment and low or negative economic growth in a number of euro zone countries.

In general, floating exchange rates are likely to deal with economic shocks at lower cost than fixed exchange rates or single currency arrangements. This was not the major consideration, however, when countries decided to join the euro. Many of the countries that joined the single currency did so because it was thought that external discipline on domestic governments would have beneficial long-term effects.

Historical evidence suggests that monetary unions that have not been followed by political unions have tended to fail. This does not mean that such unions are impossible. In this respect, however, the euro was an experiment. It might be possible to proceed from the current position to a euro zone made up of a smaller number of countries. Any countries participating in a single currency should, however, examine carefully their long-term fiscal balance sheets if the strong are not to become responsible for the debts of the weak. This process should include careful analysis of pension and other long-term liabilities. Indeed, if the euro survives the current crisis, it could be brought down by government indebtedness caused by pension liabilities.

It is very difficult for countries to leave the euro although members could be suspended. Suspension should happen in the case of Greece, at least. This could be followed by the adoption of parallel currency systems whereby the euro can be used alongside new domestic currencies in those member states that are suspended. Currency competition would complement a more general agenda for decentralisation in the EU.

If there is a break-up of the euro, it is extremely important that it happens in an orderly way. This will be difficult to achieve because the EU elite are unwilling to countenance the possibility that the euro might break up and will therefore not plan for such an eventuality. A break-up of the euro must go hand in hand with vigorous promotion of free trade in the difficult political environment that will exist.

An alternative solution to the euro crisis would be to return the euro to its founding principles. There could be very strict enforceable ex ante rules that all member countries had to meet. Countries that
did not abide by the rules would take no part in the economic and monetary policy decisions of the EU or would be suspended from membership.

EU states could also decide that monetary policy should be decoupled from government altogether. The euro has not succeeded as a single currency with its current institutional mechanisms, and state currencies have often proved to be inflationary. On the other hand, free banking systems create the right incentives for bankers to act prudently and to not inflate the money supply.

Suggested Citation

Booth, Philip and Cabrillo Rodríguez, Francisco and Castaneda, Juan Enrique and Chown, John and Dannhauser, Jamie and Dowd, Kevin and Hengstermann, Katja and Herzog, Bodo and Lilico, Andrew and Minford, Patrick and Record, Neil and Schwartz, Pedro, The Euro – The Beginning, the Middle...and the End? (April 12, 2013). Institute of Economic Affairs Monographs, Hobart Paperback 39, 2013; Institute of Economic Affairs Monographs, 2013. Available at SSRN: https://ssrn.com/abstract=2267446

Philip Mark Booth (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Francisco Cabrillo Rodríguez

Complutense University of Madrid - Industrial and Financial Analysis Institute (IAIF) ( email )

Av Séneca
Madrid, 28040
Spain

Juan Enrique Castaneda Sr.

University of Buckingham ( email )

Hunter Street
Buckingham MK18 1EG
United Kingdom

John Chown

Independent

Jamie Dannhauser

Lombard Street Research ( email )

London EC3V 9EA
United Kingdom

Kevin Dowd

Nottingham University Business School (NUBS) ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

Katja Hengstermann

Independent

Bodo Herzog

Reutlingen University - ESB Business School ( email )

Alteburgstr. 150
Reutlingen, 72762
Germany

Andrew Lilico

Europe Economics ( email )

Chancery House
53-64 Chancery Lane
London WC2A 1QU
United States

Patrick Minford

Cardiff University Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom
+44 29 2087 5728 (Phone)
+44 29 2087 4419 (Fax)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Neil Record

Record Currency Management Limited ( email )

Morgan House
Madeira Walk
Windsor SL4 1EP, Berkshire
United Kingdom

Pedro Schwartz

Universidad CEU San Pablo ( email )

Julian Romea, 23
Madrid, 28003
Spain
00 34 609 11 77 22 (Phone)

HOME PAGE: http://www.pedroschwartz.com,

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