That Joe Stiglitz insists that the euro, that European currency, was a disastrous mistake is well known. He’s just published an entire book on the subject after all. That Paul Krugman is less than keen on it is also well known – he’s been pointing out why it won’t work without a great deal more fiscal integration for some time now. Completists will know that Milton Friedman was against it too as this piece from 1997 shows:


If one country is affected by negative shocks that call for, say, lower wages relative to other countries, that can be achieved by a change in one price, the exchange rate, rather than by requiring changes in thousands on thousands of separate wage rates, or the emigration of labor. The hardships imposed on France by its “franc fort” policy illustrate the cost of a politically inspired determination not to use the exchange rate to adjust to the impact of German unification. Britain’s economic growth after it abandoned the European Exchange Rate Mechanism a few years ago to refloat the pound illustrates the effectiveness of the exchange rate as an adjustment mechanism.


A single currency removes one of your tools to deal with asymmetrical shocks across the currency zone. You cannot vary the exchange rate to aid in dealing with such shocks. In fact, given the single currency, the single monetary policy, and the straightjacket insisted upon about fiscal policy, there is only one policy left. Those changes in thousands upon thousands of separate wage rates or, as we also call it, internal devaluation.


Anyone who has been reading these pages for any length of time will know that I make this point often enough. What is being added today is that Paul Krugman has been quoting James Tobin on the point:


the empirically questionable implication of the usual natural rate hypothesis that unemployment rates only slightly higher than the critical rate will trigger ever-accelerating deflation. Phillips curves seem to be pretty flat at high rates of unemployment. During the great contraction of 1930-33, wage rates were slow to give way even in the face of massive unemployment and substantial deflation in consumer prices. Finally in 1932 and 1933 money wage rates fell more sharply, in response to prolonged unemployment, layoffs, shutdowns, and to threats and fears of more of the same.


Friedman and Tobin were often thought as the antithesis of each other. But there’s a lot more agreement among seemingly very different economists than people might generally think. There might be certain issues where people are trying to work something out for the first time where there is disagreement. But the general foundations of the subject are agreed across those divisions.



As here, with Friedman laying out the basic point about how internal devaluation will be the only policy left and Tobin pointing out just how damn difficult it will be to do. Another way of reading Tobin there is the amount of economic pain that will have to be inflicted to get those wage rates to fall. He and Friedman would have agreed that varying the exchange rate was going to cause a great deal less grief. At which point Krugman:


Sure enough, the return of mass unemployment after 2008 didn’t produce much in the way of wage decline, except, finally, after years of Depression-level unemployment in Greece.


The structure of the euro insists upon the most difficult, the method with the greatest human suffering, way of adapting economies to such asymmetric shocks. Which is, of course, why it is a disaster. For inflicting human misery isn’t notably thought of as being a desirable object of public policy – rather the opposite in fact, alleviating it is.


Yep, it’s a disaster. And it doesn’t in fact need four Nobel Laureates to tell us either. It’s as plain as the nose on my face that it is – and thus the sooner it collapses the better. Hopefully along with that system that brought it into being, the EU itself.