The devalue-your-way to prosperity proponents are out in full force in spite of the mathematical silliness of it all.
Three writers of the Wall Street Journal article Weak Currency Stands to Buoy Zone Exports propose Europe is in the midst of a “weak recession” and a falling Euro will help exporters.
Weak recession? We will see about that.
At the top of the “beggar-thy-neighbor”, weak-currency devaluation list is Martin Feldstein who writing on the Financial Times specifically proposes A weak euro is the way forward.
The Way Forward – Not
Feldstein believes “The key is to expand the net exports of those trade deficit countries to the world outside the eurozone.”
Yet at the same time Feldstein readily admits “The politicians who planned the euro, generally did not think about future current account imbalances or other economic problems. They wanted the euro as a means of accelerating political integration.”
Moreover, Feldstein specifically notes “Productivity in Germany rose much faster than it did in Italy, Spain and France. Germany also placed limits on wage growth. Those two factors mean that labour costs in Germany’s tradable sector have risen some 30 per cent less since the start of the euro than labour costs and prices in those countries with slower productivity growth.”
Proposal to Fix the Unfixable
Devaluing the Euro cannot and will not fix those structural problems. In essence Feldstein wants to fix a problem that is not fixable.The amazing thing is Feldstein nonetheless wants to try anyway with proposals he knows full well cannot work.
Put Feldsetein in the can-kicking group with this admission: “A decline of the euro cannot be a permanent solution to differences in productivity trends within the eurozone. But it would give those countries time to improve productivity growth before the euro’s fundamental strength returns.”
Can the Euro Be Saved?
Given that the Euro is fundamentally flawed, even if it could be saved, why should it be saved? At what cost? To whom?
Feldstein does not specifically address any of those questions, although does wonder how much the Euro needs to fall.
Wondering how far the Euro needs to decline to “save the euro” is akin to wondering how many peanuts elephants need to eat before one can launch a rocket ship to the moon.
Ironically, Feldstein concludes “If those relative improvements in productivity do not happen, there may be no choice but to end the eurozone as we know it today.”
Why Don’t We Start There?
Getting Greece, Spain, Portugal productivity up to the standards of Germany is NOT going to happen while all those countries are on the same currency with the same interest rate (and probably not under any circumstances at all).
While currency devaluation may in theory help one country in isolation, it cannot save the global economy or Europe as an entity.
Feldstein should know that, and I suspect he does. Unfortunately, he refuses to go down the only path that makes political and economic sense.
This is after all, not only about economics, but also about political realities.
Political and Economic Realities
The political and economic reality is the Euro has failed. It was fundamentally flawed from the beginning. Politics suggests it is too late to start over. Germany will not go along, and in my opinion, for excellent reasons.
So, instead of attempting to fix the unfixable, why not work on the best plan to break up the Eurozone?
Not every country can run a current account surplus. Yet, every country wants to. On May 19, 2011, Paul Krugman Praised a Weaker US Dollar.
What’s driving the turnaround in our manufacturing trade? The main answer is that the U.S. dollar has fallen against other currencies, helping give U.S.-based manufacturing a cost advantage. A weaker dollar, it turns out, was just what U.S. industry needed.
Yet the Federal Reserve finds itself under intense pressure from the right to make the dollar stronger, not weaker.
- Krugman and the Fed want a weak Dollar
- Feldstein and European countries want a weak Euro
- Switzerland wants a weak Swiss Franc
- Japan wants a weak Yen
- China wants a weak Yuan
Can someone, anyone, tell me how that is supposed to work?
Magically it’s supposed to. Yet, mathematically its impossible in relation to each. However, it is possible in relation to another currency: gold.
Amazingly, not even Nouriel Roubini can figure that out, which prompted my article Dear Nouriel Roubini: The Fundamental Case for Gold Has Not Changed; To Understand, All Roubini Need Do is Look in a Mirror.
Here’s the deal: If the Euro slips, the dollar must by definition rise. If dollar exports then drop, the Fed may respond with QE3 and Japan may sell the Yen.
Note the extreme silliness of the circular proposals to weaken everything, yet the writers cannot even see it. It’s a sad testament to the absurd grip Keynesian and Monetarist theory has on academia, Nobel prize economists, and in general economic writers most places you look.
Mike “Mish” Shedlock