What is the price to save the Euro : Isn’t Worth Saving writes Matthew O’Brien

Welcome to life in a suboptimal currency area. After all, countries that share a currency also share monetary policy. If they don’t share fiscal policy too — that is, there is no centralized treasury — they can get into trouble. Just ask Europe. But as Christian Odendahl at The Economist points out, this also means that each individual country’s fiscal policy becomes a much, much more important economic tool than it would otherwise be. Let’s think about why this is, and what it says about the future of the euro.

As previously mentioned, monetary policy is usually the first, best, and only policy tool to stabilize the economy. It’s quicker and more efficient than government spending. (Anything that cuts out Congress is usually a good idea). But all of that changes when it comes to the ECB. At best, the ECB runs a one-size-fits-one policy. Interest rates make sense for Germany, but not really for anybody else. At worst, the ECB runs a one-size-fits-none policy. Interest rates don’t make sense for anybody: They’re too low for Germany, but too high for Spain. So, rather than stabilizing the economy, monetary policy actually destabilizes the economy. The booms and busts both get bigger. It’s left to each country to use government spending to temper both.

Which brings us back to our original question: How big should Spain’s surpluses have been during its housing bubble days? In retrospect, they should have been huge. The logic is that less government spending would have helped cool its overheated economy. The bubble might not have been quite as bad. But only quite. And, again, this was necessary because of the euro. Spain couldn’t just raise interest rates to slow down its economy because Spain couldn’t raise interest rates…

Source:

via Why the Euro Isn’t Worth Saving – Matthew O’Brien – Business – The Atlantic.