Greece and Milton Friedman’s case for flexible exchange rates

November 4, 2011

The deterioration of the Greek economy is not unique in the Euro-zone (EZ), only more acute than that of its peers. As discussed in our previous post on this topic, the flaw in the design of the Euro-zone (EZ) is one-size-fits-all monetary policy in a monetary union. Some get too much slack, when others need more of it.

In a centrally planned system, such as the US federal government, states that are lagging see their share of fed spending stable (in fact, increased through social benefits) whereas their contribution in taxes is comparatively reduced. It’s easy to understand, therefore, that this acts a counterbalancing mechanism in a downturn.

The EU’s remedy for Greece has centered on internal devaluation, a broad term that encompasses austerity and reducing wages. It has brought hardship but, so far, few of the  desired gain in competitiveness. The alternative route, advocated by Nouriel Roubini, is to exit the Euro and let the new currency depreciate. Competitiveness up, trade deficit down.

Let’s present the argument in the words of Milton Friedman. Read the rest of this entry »

Way out of the debt crisis (Euro-English)

October 30, 2011

Here’s the link to the relevant press release of the European council. “Way out” probably translates (from Euro-English) to “The way out”… Not having really paid  attention to the existence of the council, I wondered : why not the European commission? My concern was assuaged : both presidents are pictured in the photo op

Trivialities aside, experts on the matter are at best lukewarm in sharing the optimism of the title although markets seemed to have welcomed it rather well. While they sort out the details in the coming days, let’s review why the Euro has so much trouble picking itself up. Read the rest of this entry »