A recent Financial Times article (January 8, 2023) – Currency Independence Overestimated, Euro Higher – From Martin Sandbu, who emphasized credibility and continued the long tradition of pro-euro economists trying to defend the untenable – fixed exchange rate, common currency system. He claims that the euro is a better system for modern disasters than monetary independence. However, as I explain below, none of his arguments provide a rationale for the advantages of the eurozone relative to the independence of currency issuance. Governments that issue money are bound to roll out bad policies—often because policymakers refuse to acknowledge their own capabilities and believe they must behave as if the country doesn’t have its own currency. But the resulting negative consequences are a testament to the poor quality of the regime, rather than any shortcoming of monetary independence. Euro members are being bailed out by central banks, and if the bailout stops, the system will demonstrate the inherent dysfunction of its monetary architecture and countries will fail.
The three parts are as follows:
1. European countries are lining up to join or use the euro as their currency – thus giving up their own monetary sovereignty.
2. This means that the common currency is attractive.
3. The argument that giving up monetary sovereignty is dangerous and ultimately costly “is becoming less and less convincing, and the changes that are taking place in the way currencies work illustrate the strengths of the euro.”
4. Owning your own currency is now a burden.He builds this argument by claiming the advantages touted by those who support the currency
The Independent argues that the advantage is that exports increase when the currency is devalued, which offsets any costs of the devaluation.
He cited the example of the UK, which he claimed had experienced depreciation without any corresponding increase in exports, and that rising import prices made people poorer.
In fact, the pound has strengthened against the euro since the global financial crisis. 1 pound was exchanged for 1.1327 euros in January 2010 and 1.1512 euros by the end of 2022.
In addition, it is difficult to assess Brexit due to data uncertainties brought on by the pandemic.
What the GDP per capita figures tell us is that before the pandemic, the UK was much stronger than the 19-member eurozone, and now it is only slightly worse than the eurozone countries.
The UK has suffered more during the pandemic than eurozone countries, but only slightly.
The difference is that it turned out to be difficult to justify monetary sovereignty or a range of factors cited by Brexit or euro apologists
Also, I wouldn’t build a case for monetary sovereignty based on a country’s ability to export.
The EMU aims to integrate the different forces in Europe (history, culture, language, etc.) into a common monetary framework by imposing fairly strict rules related to fiscal policy (SGP) and monetary policy (no bailout).
When these rules are applied, differences in economic capacity between countries quickly become apparent, and in 2010 and 2012 we saw how breaking the rules brought countries like Greece and Italy to the brink of bankruptcy.
Currency-issuing countries have not faced bond market stress like individual member states that used the euro during the global financial crisis.
If the ECB is not effectively financing the deficits of these countries – which in my opinion is against the rules of the treaty – then these countries will no longer use the euro.
No currency-issuing government faced bankruptcy during or after the global financial crisis.
This is how to think about monetary sovereignty, or independent superiority.
The Australian government will never be at credit risk with a deficit.
Italy has been doing this and is relying on the ECB to reduce this risk.
5. Sandbu claims superiority of common currency has been “highlighted by European energy price crisis”
He wrote:
Take Slovakia, for example. Yes, it has to contend with high inflation similar to its non-eurozone neighbours. But it does so while enjoying much lower interest rates (2.5% at the European Central Bank) than the Czech Republic and Poland, where borrowing costs are nearly three times higher, or 13% in Hungary.
Facts are facts.
But they offer no reasons for or against a common currency.
They tell us:
(a) The central banks of the Czech Republic, Poland and Hungary raised their own rates above the ECB, under the false belief that higher rates would somehow address the massive supply-side shocks that were driving the inflation event.
(b) This shows that regardless of currency status, dominant ideology is at work.
(c) Moreover, the governments of the aforementioned non-euro area countries simply chose to live with “higher borrowing costs”. Their central bank could simply do what the Bank of Japan is doing and control yields in their bond market, or better yet, they could stop issuing bonds to match government spending.
Again, this is a statement of ideology, not the intrinsic capabilities of the currency.
(d) “Borrowing costs” are lower for Slovenia because the ECB is controlling interest rate differentials.
If they don’t, then regardless of the ECB’s overnight cash rate since the Slovenian government relies entirely on private bond markets to supply euros to record fiscal deficits.
6. Sandbu wrote:
In a global economy whose rhythm is still determined by the U.S. financial cycle, size matters, and only monetary unification of the euro zone economies will give the ECB some degree of independence from the Fed.
Tell Japan.
Its monetary policy is very different from that of the Fed, and it can maintain it for as long as it wants.
7. The third part uses the UK again:
Last summer, however, it was not Italy but the new populist government in the UK that severely disrupted markets with irresponsible policymaking. Ultimately, the Bank of England had to intervene to rein in sovereign yields.
Likewise, what happened to the UK was not a result of having its own currency, but the fact that its government was torn apart by divisions and uncertainty about policy choices – capricious.
The bond market knows these factors will allow them to challenge the currency (short selling, etc.) while the government gives up and offers a profit.
Absurd increases in CEO salaries due to neoliberal dynamics have contributed to financial weakness and mismanagement of pension funds.
I discuss this issue in this blog post – UK’s final week showcases key MMT propositions (September 29, 2022).
I also went on to ask this question: If the UK demonstrated the power of bond speculators, why didn’t Japan end up with the same result given the number of posers lining up to “test” the yen every day?
8. Clearly, the ECB is better suited to introduce a digital currency – although there is no evidence to support this claim and the advantages are not clear.
Remember how cryptocurrencies were going to replace central banks?
but…
On January 1, 2023, Croatia is finally on track to join the Eurozone, 10 years after joining the European Union.
Pro-Europeans use it to argue that, far from being in recession, the eurozone is the way forward, as the subtitle of the FT article points out:
Old misgivings about money are less convincing – it’s becoming more attractive
When assessing the veracity of this statement, two things should be kept in mind:
1. Since the pandemic, the pernicious rules that define the Stability and Growth Pact (SGP) have been relaxed under emergency clauses (general exception clauses) that make it almost impossible for the (now) 20 countries that use the euro to enjoy continued prosperity) .
inside – Council Recommendation of 5 April 2022 on economic policy in the euro area, OJ C 153, 7.4.2022 – Here is the latest statement from the European Commission on the subject, we have learned:
While the general disclaimer will continue in 2022, it is expected to cease in 2023. As the economic recovery takes hold, fiscal policy is shifting from temporary emergency measures to targeted recovery support measures. The government debt ratio increased from 85.5% of GDP in 2019 to 100% of GDP in 2021, reflecting the combined impact of output contraction and the necessary policy response to the very large shock of COVID-19.
The chart below shows the current fiscal position of the 20 member states in 2019 and 2021 (the red horizontal line is the 3% SGP threshold).
While only Spain exceeded the permissible SGP fiscal deficit threshold before the pandemic, all major countries have exceeded it by 2021, and 2023 would be the year 2023 if transitional procedures were implemented – as implied by the above Council recommendations. This scenario – will be subject to fiscal austerity from the European Commission, which will undercut any growth gains they may have made.
2. As a result of the massive government bond purchase program which started in May 2010 and the Securities Market Program (SMP) and continues to this day – in various forms (APP, PEPP, etc.).
All in all, the original design of the Economic and Monetary Union (EMU) was ignored by the authorities when it faced a major collapse, first during the global financial crisis and second due to the pandemic.
The reason why the euro area is intact is not because the original structure is sound and can withstand external shocks.
Rather, it is because central banks willfully ignored the so-called no-bailout clauses in the relevant treaties and blocked private bond markets by (indirectly) financing government deficits and suppressing yield spreads.
Then, the European Commission went a step further and suspended – excessive deficit program – its so-called “orthopedic arm”
Thus, the dynamics of the global financial crisis – many countries facing bankruptcy – have not been repeated during the pandemic – because the EMU architecture has been set aside and major economic institutions have been operating outside of the “normal” system.
If the excessive deficit procedure is resumed, the only way for some member states to avoid bankruptcy is to continue buying ECB bonds.
If this is given up, then we’d rather see catastrophe roll back sooner rather than later.
in conclusion
None of his arguments offer a justification for the advantages of the eurozone over the independence of currency issuance.
Governments that issue money are bound to roll out bad policies—often because policymakers refuse to acknowledge their own capabilities and believe they must behave as if the country doesn’t have its own currency.
But the resulting negative consequences are a testament to the poor quality of the regime, rather than any shortcoming of monetary independence.
Euro members are being bailed out by central banks, and if the bailout stops, the system will demonstrate the inherent dysfunction of its monetary architecture and countries will fail.
Enough for today!
(c) Copyright 2023 William Mitchell. all rights reserved.
