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The reason the euro doesn’t work

Summary:
No, not just because it’s the euro. Rather, it’s simply too large an area, across too much divergence in local economic conditions, for it to be an optimal currency area. Paul Ormerod uses this to illuminate the British regions - the pound sterling is also too large an area:The weaker economies are not sufficiently competitive to produce enough goods and services that others want to buy. They run a balance of payments deficit with the world outside their borders.And in a monetary union, a balance of payments deficit translates into lower growth and higher unemployment. Standard trade theory in economics shows this clearly.At least in the UK, the poorer regions get compensation in the form of large transfers of money from the more successful ones to finance their trade deficits.That last is

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No, not just because it’s the euro. Rather, it’s simply too large an area, across too much divergence in local economic conditions, for it to be an optimal currency area. Paul Ormerod uses this to illuminate the British regions - the pound sterling is also too large an area:

The weaker economies are not sufficiently competitive to produce enough goods and services that others want to buy. They run a balance of payments deficit with the world outside their borders.

And in a monetary union, a balance of payments deficit translates into lower growth and higher unemployment. Standard trade theory in economics shows this clearly.

At least in the UK, the poorer regions get compensation in the form of large transfers of money from the more successful ones to finance their trade deficits.

That last is indeed the standard response to that optimal area problem. Have fiscal transfers and it’ll be possible to have a larger currency area.

But then look at the conclusion here. Which is that even with those fiscal transfers the pound sterling is over too large an area for it not to continue to impoverish the peripheral areas. And the fiscal transfers within the UK are quite obviously massively larger than anything that would be politically possible across the nation states in the EU.

That is that common European Treasury idea that keeps getting floated, even that wouldn’t be a solution to the euro’s woes. It’s a currency which just covers too many people, over too much economic variation, for anything at all to make it work.

Tim Worstall
Tim Worstall is a British-born writer and Senior Fellow of the Adam Smith Institute. Worstall is a regular contributor to Forbes and the Register. He has also written for the Guardian, the New York Times, PandoDaily, the Daily Telegraph blogs, the Times, and The Wall Street Journal. In 2010 his blog was listed as one of the top 100 UK political blogs by Total Politics.

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