Asymmetrical Information

As a foreign policy instrument, the euro is irrelevant in of itself. On any street, whether its Wall Street or Saddam Huessein Blvd, dollars are king.

I think the sickness behind France's and Germany's foreign policy position infects nearly every economic decision they make including how they circulate the euro. For instance, it was nearly a year ago when they began exchanging Iran's currency with the euro. In the 80s, dictators were bribed with Kalishnakovs by the Soviet Union. In the 00's, the EU is buying off dictators with euros.

Watch their rhetoric -- Back last July I blogged on their response to Enron. They blamed it on GAAP and then proposed their own accounting standard stating that such problems would never happen in their system. And what happened? A massive flight of capital from Wall Street as foreign investors pulled their money. Yes, a part of the problem was definitely a valid lack of confidence, but the EU certainly did its share to convince investors to take their money out of the US by promoting their system (which by any stretch of reality is way worse than ours).

http://europa.eu.int/comm/internal_market/en/company/company/news/ecofin_2004_04_enron_en.pdf

As far as I'm concerned, the EU is like a company that has to sell its products below cost in order to make sales. In the short run, they beat everyone in the market to a pulp as customers choose the lowest cost provider. Long run, its obviously unsustainable. But let's not just stop at the euro -- this is a disease that affects every aspect of their business dealings. Just look at what Airbus is having to do to win sales in their own backyard to beat Boeing: they have to guarantee a repurchase price of their planes in order to sell them. That's after a 40% discount.

As far as I'm concerned, we're just witnessing the start of the extreme lengths that a dying continent/economy will go to avoid complete economic disaster.

Wouldn't a near total collapse of the EU economies spell bad things for the world economy as a whole? The "I told you so" factor is nice, but I'd rather they pulled out of it.

i have just one question, how good was the dollar before you had a federal reserve and the sec (monetary, banking and capital markets oversight)?

Timmy:

The problem w/ that comparison is that to go that far back before the Fed and the SEC, you're talking probably at least the turn of the LAST century.

The American dollar was hardly a major currency (iirc, it was the pound sterling). But then, the US was also not a major power, either, in ANY sense of the word.

Part of the reason for the current strength of the dollar is the perceived security of the United States---its money won't devalue (by gov't fiat), b/c the US won't disappear, be taken over, etc. (This is also why US Treasury bills are considered such a safe investment among foreigners.)

In this regard, in some ways, the euro is better off (Europe is certainly stronger today, relative to the US and the world, than the US was in, say, 1900, relative to Europe and the rest of the world). At the same time, however, the euro is for a region that is nowhere near as unified as the US was in 1900, either. (Unified politically, or economically.)

Well I haven't heard that labor mobility is an advantage for the EU. Labor mobility is actually quite poor, at least in comparison to the U.S.

Timmy asks: i have just one question, how good was the dollar before you had a federal reserve and the sec (monetary, banking and capital markets oversight)?

As good as gold.

"i have just one question, how good was the dollar before you had a federal reserve and the sec (monetary, banking and capital markets oversight)?"

It was solid. It was 100% convertible into gold, and the conversion was guaranteed by a country that had never failed (and still has never failed) to pay its debts. It wasn't the world standard currency -- that was the pound sterling -- but there's a reason the phrase "sound as a dollar" came into the language.

Most of the structural problems of the EU member states can be fixed, given some time, if they develop the will to do so- and if those structural problems continue to pose problems for the EU member states, they will probably develop that will.

The big problem seems to me to be the low birth rate of native Europeans combined with the poor assimilation of immigrant populations. This is something we've always been fairly good at in the US, by necessity, and I would guess that how well the EU does at it in the next decade will determine how well it fares economically for the next few.

"Its money won't devalue (by gov't fiat)" says Dean of the US. But that's not the only way the dominance of the dollar can be challenged. As Brad deLong is currently observing - http://www.j-bradford-delong.net/movable_type/2003_archives/001331.html - fiscal policy is lurching out of control, and the credibility of treasury bills won't hold out against that indefinitely. And the other huge opportunity for the euro is to become the dominant globale trading currency - which already makes sense for commodities such as oil where Europe's share of internationally traded flows is greater than that of the US.

Whether Europe can make a go of it is a big unanswered question. But there is no doubt that it is in the US interest that the euro should fail to become more than a local currency - and therefore little doubt that the US will figh to keep its advantage.

i would add a fourth reason to feldstein's analysis along lines of marek's post above:
the us is the de facto world standard currency (with debt denominated overwhelmingly in it and to a lesser extent swiss francs). as such the seignorage benefits of this are enormous. if (and it is a big if) the euro displaced the american currency in this capacity, i should think this would go a long way to boosting european economic growth (and hindering us growth at the same time--even if we benefit from increased international economic activity)

Living in Europe, and loving the euro for its handiness, I was a bit surprised to hear any mention about how "mobile" our labor markets are. If anything, experience is quite the opposite. In fact, there is a continual push and talk toward really liberalizing the labor markets, with common standards, etc. Take Spain for example, where it's quite expensive to layoff people, or France where a company can be fined for having employees work more than 35 hours per week.
Just a few thoughts.
Cheers

Didn't M. Friedman give the euro 10-15 years? And unless there's a gun to Europe's head, they're never going to do any real substantial market reform.

What do we keep hearing out of them? We don't want to be the US. They're way too addicted to their bennies to give them up. They keep lurching left to the former USSR. Could the euro be the new ruble?

And agreeing w/Jesus, francypants will not give up an inch to any other country until a stake is put thru it and the sun rises just to be sure.

labour market mobility in europe = labour has the mobility to move from market to market... not as in "free market in labour" duh.. this is europe!!!

you'll also notice that the US and UK had precious metal backed currency (lb sterling actually meant something for one hell of a long time) and have extremely long lived governments (interruption in england last happened in the 1600s...us, 1770s or 1860s) compared to their rivals (germany in 89/48, france in 60s... )

and no, there shouldn't be any significant disruption to the us economy if europe implodes... a they'd probably end up importing more, and b they'd stop screwing our export markets!...

when you can pay off a nigerian businesman, a russian mobster, and a mexican cop with euros, then there might be a problem! but soon the germans lose control of the euro to a frenchman to be named later who has not been publically acknowledged as a crook... we'll find out in a few years!)

"if (and it is a big if) the euro displaced the american currency in this capacity (reserve currency), i should think this would go a long way to boosting european economic growth"

I know he isn't too popular in these parts, but Krugman thinks reserve currency status is only worth .1% of GDP or so. In other words, nothing.

hi lua,
"and no, there shouldn't be any significant disruption to the us economy if europe implodes... a they'd probably end up importing more, and b they'd stop screwing our export markets!..."

unbelievable.

Contrary to what Jane wrote, labor mobility is quite poor in Europe compared with the US, and I can't believe she thinks the unified currency is the best feature of the Euro. It makes no sense for Ireland, Portugal and Norway, each w. vastly different economic situations, to all have the same interest rates. And, since no one can really enforce the budget deficit cap, euro rates could be affected by irresponsible governments which aren' accountable to the rest of the union. Other than the common agricultural policy, I think the monetary system is the *worst* feature of the EU.

Hoo great stuff!

nice

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