I have recently made the comment that 'a currency cannot be imposed on a country; it must fit the country's culture'. That generated quite a bit of criticism. It is stupid, some people felt, because it makes absolutely no sense. Well, it certainly doesn't make sense if one is not prepared to think what may be behind that argument.
The NYT commentator Roger Cohen wrote a beautiful piece about what I meant. Yes, there is a difference between a culture driven by the Reformation, the Protestant Ethic, the Enlightenment, etc. and a culture driven by other things. One could, of course, argue whether the Euro helps to bring these cultures together or whether it splits them. Roger Cohen seems to think that the Euro could unite different cultures. Evidence todate would suggest that it splits them.
Ralf Dahrendorf said in 1995 (!) that "The common currency project drills the countries to German behavior, but not all countries want to behave like Germans do. For Italy, periodic devaluations are much more useful than a fixed exchange rate and for France, higher government expenditures are more meaningful than a rigid adherence to stability criteria (which are, above all, an advantage for Germany). Yes, France and Italy go along with German demands if for no other reason than national pride. However, the price for that is very high and it could soon become apparent that it is too high - psychologically, politically and economically".
That's another good example of what I meant.
The NYT commentator Roger Cohen wrote a beautiful piece about what I meant. Yes, there is a difference between a culture driven by the Reformation, the Protestant Ethic, the Enlightenment, etc. and a culture driven by other things. One could, of course, argue whether the Euro helps to bring these cultures together or whether it splits them. Roger Cohen seems to think that the Euro could unite different cultures. Evidence todate would suggest that it splits them.
Ralf Dahrendorf said in 1995 (!) that "The common currency project drills the countries to German behavior, but not all countries want to behave like Germans do. For Italy, periodic devaluations are much more useful than a fixed exchange rate and for France, higher government expenditures are more meaningful than a rigid adherence to stability criteria (which are, above all, an advantage for Germany). Yes, France and Italy go along with German demands if for no other reason than national pride. However, the price for that is very high and it could soon become apparent that it is too high - psychologically, politically and economically".
That's another good example of what I meant.
Also explains why the other two major currency unions (Central/West African Franc & East Caribbean Dollar) have functioned more or less successfully since their inception, the 50's for the CFA Franc and the '80's for the ECD. The countries in each have a lot in common with one another, including history (French & British colonies respectively), economic development status, culture and language. What they don't have a lot of, is cross-border trade.
ReplyDeleteBBC did a short interview with an Oxford Analytica analyst yesterday on the mood of Brazil and other Latin America countries that lead to their abstentions from voting at the recent IMF meeting. I suspect later retractions from Brasilia are smoke screen cover ups. As Caesar is said to have said as he crossed a certain river, Jacta alea esto, although he probably said Ἀνερρίφθω κύβος, rendered in English as let the die be cast.
Two numbers that took my attention were - the EU holds 1/3 of the voting rights on the IMF board (I knew that) and 3/4 of the IMF's outstanding loans are owed by EU member states (didn't know it was that high). That would include loans to Latvia, Hungary etc. But still and all its easy to see why countries like Brazil are fed up pouring money into countries like Greece. The GDP (PPP) per capita (2012) for each are
Greece - USD24,505
Brazil - USD11,875
The OA analyst predicted that Latin America could demand trade concessions from the EU if their abstentions are not to become No votes. Same goes for South Africa, India, SE Asia countries like Indonesia, all whom are being courted by the EU for FTAs.
If Greece wants Brazilian reals, then its going to have to import more than just toothpaste. Because it has limited heavy industry, Greece has no need to import Brazil's mineral resources in any significant quantity. But Brazil has a thriving pharma sector (as does India), pharma was one of McK's shining stars.
Be interesting to see what happens at the G20 summit.
The OA analyst thought it would take Greece and other distressed Euro countries at least 10 years to turn their economies around, and probably more like 20 years.
The analyst was refreshing in that she offered no opinions on whether the Euro was good or bad, whether it will survive or fail, or who is to blame for its current malaise.
CK
The currency has NOTHING to do with the people. All people have to work with the same rules regardless of their "culture", ie they cannot spend more than they take in.
ReplyDeleteThe only culture that is different is between governments. All governments want to spend more than they take in and they simply rob the people to get their money back through inflation. Some governments rob their citizens more than others. That is the culture difference, some governments have historically robbed the citizens more than others.
The Greek government has been a degenerate for as long as people can remember. Capital controls and 20% inflation pre Euro being the proof.
So again, the culture you talk about is government culture and not the culture of the people. All people understand they cannot spend more than they take in regardless of where they live.
Culture and mentality provoke preferences of populations and set limits to what is politically possible. There are also differences in economic know-how and experience in various populations. This results in the differences stated by Dahrendorf.
ReplyDeleteWhen Mr. Prodi was president I thought that Italy might modernize it's economy to northern standards. Today’s dire status makes it obvious that it will not happen in foreseeable future. Thorough observation of what happened in Greece leads to the conclusion that it can and should not participate in the Euro either.
When Greece has left the Euro, the blame game will stop, the population will painfully learn that economic realities have become much harder in all countries. Unless they do reform the political _and_ economic system their income will diminish even more.
H. Trickler
Different currencies with floating exchange rates alignes capital and goods flows with productivity.
ReplyDeleteThe biggest problem of the Euro has been difference in productivity. This is a cultural differnce that could be explained by the climate. Warm climate does not foster factories but did foster the product of ancient Greek philosophy.
This excellent paper paints a different picture.
ReplyDeletehttp://www.pressproject.gr/external.php?id=43458
Germany was the country that didn't stick to the common inflation target (2%).
It is also pretty enlightening about the ECB's and the European Commission's obsessive emphasis with the stocks, as opposed to their indifference with the (much more important) flows.
This is also a good paper:
Deletehttp://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.27.3.167