Prof. Krugman writes the following in his NYT commentary:
"Now what? I don’t expect to see a wholesale, sudden rejection of the
idea that money should be free to go wherever it wants, whenever it
wants. There may well, however, be a process of erosion, as governments
intervene to limit both the pace at which money comes in and the rate at
which it goes out. Global capitalism is, arguably, on track to become
substantially less global. And that’s O.K. Right now, the bad old days when it wasn’t that easy to
move lots of money across borders are looking pretty good."
I am reminded of the proposals I had made for Greece at the outset of the crisis: implement special taxes on imports, implement capital controls and perhaps even implement a temporary deposit freeze with only minimal withdrawals for personal use. All clear violations of some of the 'EU freedoms'.
The state would have had more revenues from the special (and specially targeted!) import taxes (or imports would go down, preserve domestic liquidity and perhaps even stimulate economic activity through import substitution) and about 80 BEUR could not have fled the banking system, and certainly not abroad.
A classic trade-off between religiously defending dogmas versus being practical about solutions.
A recipé for 'how to kill a national economy which has free movement of capital': dump enormous amounts of foreign funds on the economy and once the economy has gotten used to having them, call the funds back.
ReplyDeleteThe problem wasn't free movement of money. It was the disparity between fiscal regulation across Europe.
ReplyDeleteThe German banks couldn't (or wouldn't) lend in Germany because they could make more money by tipping it into Ireland. They could behave like idiots in Spain and Greece because there were no lending regulations to speak of (just like the US). Money flows into Germany because it is regarded as "safe", and flows out of Greece because it isn't.
What makes the dollar work is that you have the same system across the country - and the Americans can't even get that to work!
Bear in mind a very important reason why the dollar works, namely: mobility of labor/people. When one area of the US gets into economic trouble, there are generally migrations of Americans to other areas of the US where there are still Americans with the same language and the same TV programs. There would be no drama about, say, Ohions moving in large numbers to Texas. There would be no concern about 'Ohio's cultural heritage' going to pieces.
DeleteThis is a very important adjustment variable for the American economy to work. Personally, I cannot see how this variable can every work as well in Europe as it does in the US. After all, we have different cultural heritages and histories, preferences and prejudices, and so forth...