On the fundamental fallacies of Euro-exit advocates

Posted by Protesilaos Stavrou on 12/03/12
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The costs of exiting the euro are significantly higher than the benefits. Image credit: Reuters

Regular readers of my articles are well aware of my opposition to the argument that considers orderly exits from the Eurozone and reconstitution of national currencies as the best course of action for countries mired in economic depression, such as Greece or even the rest of the GIIPS. My opposition is established, first and foremost on my fundamentally different approach to economics; one that deviates from the economic mainstream and especially from the field of standard macroeconomics. Next my counter-arguments are based on three pillars that are often neglected by many:

  1. a revision of the very notion of “competitiveness”, where I uphold that countries do not compete with one another – only businesses do, thus a macroeconomic aggregation cannot see which sectors of the economy really need a boost of competitiveness and most importantly againstwhom. The assertion that exports in general will be boosted, is inherently flawed and misleading.
  2. no real correlation exists between exports and currency depreciation, since such claims are not consistent with the facts. The productive capacity of an industry cannot increase by means of depreciation, nor can the rooms of hotels be expanded in a similar way, nor will the fields become more fertile to increase agricultural production. Even with depreciation of the currency deep reforms are still necessary to boost real competitiveness and productivity. As such the effects of currency depreciation are at best largely overstated.
  3. there is a profound difference between a currency union and a fixed exchange rate. More so there is an even greater distinction between a currency union and a monetary union. Those laboring under the assumption that exits from the euro are good, confuse a monetary union such as the eurozone, with either a currency union or even worst with a fixed exchange rate. The eurozone is a monetary union (or Economic and Monetary Union), established upon a complex system of central banks – the Eurosystem, which then coordinates its policy with the European System of Central Banks – encompassing 17 sovereign nation-states, within the context of a single market. In addition it lacks a genuine fiscal union backing it, while its political dimension, the EU, is even more complex, resembling a “political UFO” that is neither a federation, nor a confederation, nor a super-nation, nor inter-governmental cooperation.

Anyone willing to argue persuasively in favor of an exit from the euro needs to establish the following:

  1. the gains in competitiveness of certain export industries will be greater than the losses from all other sectors of the economy that will not benefit from the massive depreciation of the currency,
  2. the purchasing power of individuals will indeed be higher than before – something that I am afraid will be almost impossible to do, given that massive inflation will quickly kick in, the financial system will be obliterated, the black market will run rampant, the state will have to increase tis supervising mechanisms to control capital, prices and collect taxes, while the (imported) standard of living of will fall dramatically,
  3. the myriads of interconnections that exist between the member-states of the eurozone, either those are measured through the payments between central banks (see analyses on the TARGET 2 payment system), or the exposure of banks to each other or to sovereigns, or even the businesses that operate across borders and finally the citizens themselves; will all not be hindered from an exit from the euro, or if they are indeed affected, the effect will be marginal and ancillary. Here I may say that any exit from the euro will simply trigger a series of cascading effects that will see full scale bank failures, massive loss of capital, great uncertainty and confusion between officials and citizens; ultimately doing much more harm than good to everyone involved, thus annulling any benefits that could have existed from an orderly exit from the single currency.
  4. the government that will have the audacity to exit the euro, creating all that smoldering mess in the process, will be perfectly prepared for political isolation or even covert diplomatic embargo, at all European centers of power. The political cost will be significant, hence those who argue in favor of an exit need to convince us that this will not be the case and still the benefits are more than the loses.

The above-mentioned list is of course non-exhaustive, as there are several other issues that one could raise to challenge the arguments that are in favor of an orderly exit from the Eurozone. However I believe that these are enough for the time being.

As a concluding remark I would first like to remind my readers that I am in favor of deep reforms at local, national and supranational level, not just in the economy but also in the political level and these can only be materialized within the context of the Euro and the European Union. A united Europe has many benefits, the point is to make it beneficial for the individuals and this will be done when we abolish all delusions pertaining to the “cornucopia” of the welfare system, the scandalous protectionist policies at EU and national level, the stunning democratic deficit at all levels of governance, especially the European; and the collusion between big governments and big corporate interests against the average consumer, worker, entrepreneur and citizen.

Exits from the euro that will supposedly produce more good than harm, are wild delusions at best and unbridled speculation at worst.

Originally posted on www.protesilaos.com

2 Responses to On the fundamental fallacies of Euro-exit advocates »»

  1. Comment by Silverio Rebelo | 2012/04/09 at 23:17:40

    Your arguments are completly fallacious. Contrary to basic knowledge of monetary policy, proven by a myriad of concrete examples. You should leave aside your european ideology before begining to reason about the economics. Ideology hinders the ability to think. You should begin by explining why is it good that Germany is allowed to gain a completly artifitial bost of at least 30 percent in competitveness, only because it is in the euro system, while contries with a weak economy belonging to the system have to sustain a orrelative 30 percent loss in competiveness. And then you should explian why it is better for the citizens of a country to pay loans to the bankers, loans needed to cover government deficits, instead of having a central bank able to emit money free of charge to cover those deficits, while at the same time injecting real investment in the national economy.

  2. Comment by Protesilaos Stavrou | 2012/04/10 at 09:13:31

    I am afraid that the only ideology involved here is that of europhobia. The “basic monetary knowledge” you mention derives from smooth mathematical, oversimplified models of economists who think in laboratory conditions and after having made several brave, if not unrealistic assumptions.

    To explain why Germany has better “competitiveness” because of lower nominal wages is egregious fallacy, for competitiveness is not only a factor of wage costs, but of many other issues that make up a business and its network.

    It is exactly this narrow sight on wage costs, which is falsely labelled as “competitiveness” that creates all this confusion and all this discussion of German vs the periphery. More so to attribute these nominal variances to the euro per se, is wrong both because it reduces a complex monetary union into a mere exchange rate, while it also excludes all the other factors that did not allow countries to invest in capital accumulation (instead of their frivolous spending on capital consumption). If you are only looking at the nominal wage level to determine competitiveness then you are looking at the hole in the barn door, without seeing the barn door itself.

    About the loans to bankers… First of all I am not defending bankers and for a better perspective you can see here >> http://www.protesilaos.com/2012/03/financial-transactions-tax-in-europe.html#.T4PaLZn9N8E

    Then it is wrong to say that people are paying the bankers because it sounds as if they are doing something terribly wrong. They got loans from them and they have to pay them back. Instead of bashing the bankers for issuing credit to reckless politicians it would be better to ask why did we get these loans in the first place? And how was that money spent? Did we make good use of it, or did it go to finance unsustainable ventures?

    These are the questions we need to ask, and not just resort to reverse moralism.

    Finally to say that central bank money is free of charge is a claim that has not been clearly thought out. The central bank can produce wealth out of nothing so that anyone can been richer with no one becoming poorer? Then why are so naive to work instead of having a central bank print money for us?

    Of course there are costs to printing money and these are quite high. In short, it creates inflation which reduces the real purchasing power of everyone. It creates moral hazard as politicians and bankers know that there is a printing press behind them supporting all of their actions, thus they become complacent and reckless and they therefore make choices that further exacerbate problems. Then you gradually lose credibility to foreigners, unless of course you are the US.

    If printing money was free, then Zimbabwe would be the richest country on earth.

    I could go down the line to demonstrate that the anti-euro arguments are based propounding tissues of unexamined chivalries, egregious fallacies and deep theoretical misunderstandings, but I think my point is clear so far.

    I am not in favor of the euro because of some “ideology”, but only because I am convinced that the costs incurred will be higher than the benefits in case of exits – always under today’s prevailing conditions.

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