Was the Euro always doomed to fail?

[mrmr96]

Think back to the world before the single European currency. There were lots of countries each with their own currency. Each currency could be changed into other currencies at an exchange rate. That rate of exchange would vary over time. Think about WHY exchange rates between currencies vary.

This is an except from what Wikipedia has to say on WHY exchange rates vary: (my bold added)

Wiki said:

A market based exchange rate will change whenever the values of either of the two component currencies change. A currency will tend to become more valuable whenever demand for it is greater than the available supply. It will become less valuable whenever demand is less than available supply (this does not mean people no longer want money, it just means they prefer holding their wealth in some other form, possibly another currency).

Increased demand for a currency can be due to either an increased transaction demand for money or an increased speculative demand for money. The transaction demand is highly correlated to a country's level of business activity, gross domestic product (GDP), and employment levels. The more people that are unemployed, the less the public as a whole will spend on goods and services.

So we know that over history all the currencies of countries now in the Eurozone used to vary against each over. These variations in the exhcange rate were basically down (in a large part, but not exclusivly) to the variations in productivity etc, and also IMO down to that countrie's fiscal policy (i.e. how much tax, and what it's spent on and indeed soverign debt/government borrowing/spending "tax" money before it's collected.)

So it seems to me that since the Eurozone was setup these variations in policy and productivite between countries has continued, but since there's now a single currency there's no method for variations in the exchange rate between countries. (I.e. it's basically been artificially fixed at 1:1). So there's no way for a productive country to have it's currency valued up, nor for an unproductive country to have it's currency valued downwards.

So it seems to me that it was inevitable tha the Euro was doomed to fail from the start, because of the variations in fiscal policy and production between member countries which couldn't be relieved through variations in the exchange rate between those countries.

Is it just me who sees it like this? Because unless I've missed something (hugely likley!) it seems like this idea was always doomed. What do you think?

[Fittster]

Name a fiat currency that has stood the test of time.

http://georgewashington2.blogspot.com/2011/08/aver...

The average life expectancy for a currency is 27 years.

Edited by Fittster on Friday 11th November 14:54

[0a]

Yes, I sat in an economics class back in the day arguing that you cannot shove divergent countries that have governments elected locally into a common currency. The only way it can work is if national governments are abolished and one economic and fiscal organisation runs the lot, with massive transfers between regions. You may or may not like that, but there is no way France and Germany will allow themselves to drop out of existence as an independent nation in any meaningful definition of the word.

[jeff m2]

Once you have countries allowed in that are still using the horse and cart to get their veggies to market, the writing should have beeen on the wall.

Although just using the Euro is not the problem, it was borrowing in it.
Crap countries were allowed soverign debt at ridicoulously low rates, enabling them to borrow far in excess of their status.

Multinationals with far better bal sheets pay way more for their money.

BUT politicians want money lent to countries that buy stuff from them. (or already owe them money)

That's a yes

[Major T]

Fittster said:

Name a fiat currency that has stood the test of time.

http://georgewashington2.blogspot.com/2011/08/aver...

The average life expectancy for a currency is 27 years.

Edited by Fittster on Friday 11th November 14:54

From the article: I name GBP.

[Uhura fighter]

mrmr96 said:

.......So there's no way for a productive country to have it's currency valued up,

Imagine what would happen in Germany if the Euro fell apart.

[Ozzie Osmond]

Do you think the shared currency between England, Scotland,Wales and Northern Ireland can work? Sounds a bit like the Euro to me....

[Fittster]

Major T said:

Fittster said:

Name a fiat currency that has stood the test of time.

http://georgewashington2.blogspot.com/2011/08/aver...

The average life expectancy for a currency is 27 years.

From the article: I name GBP.

The pound as a fiat currency goes back about 80 years.

[mondeoman]

Ozzie Osmond said:

Do you think the shared currency between England, Scotland,Wales and Northern Ireland can work? Sounds a bit like the Euro to me....

Strawman.

It developed over centuries, as did currencies in other countries that merged. With centralised power and a "common market" eg the UK, it was going to be OK.

[Esseesse]

Ozzie Osmond said:

Do you think the shared currency between England, Scotland,Wales and Northern Ireland can work? Sounds a bit like the Euro to me....

We collect taxes centrally, financially the whole of the UK is one country. If the SNP get what they want you're right though.

[mrmr96]

Esseesse said:

Ozzie Osmond said:

Do you think the shared currency between England, Scotland,Wales and Northern Ireland can work? Sounds a bit like the Euro to me....

We collect taxes centrally, financially the whole of the UK is one country. If the SNP get what they want you're right though.

Exactly. It works here because of the central governance. The only way it could possibly work in Erope IMO would have been with a single Government with universal tax/spending.

[Rude-boy]

0a said:

Yes, I sat in an economics class back in the day arguing that you cannot shove divergent countries that have governments elected locally into a common currency. The only way it can work is if national governments are abolished and one economic and fiscal organisation runs the lot, with massive transfers between regions. You may or may not like that, but there is no way France and Germany will allow themselves to drop out of existence as an independent nation in any meaningful definition of the word.

Had just the same conversations when we bailed from the ERM in our Economics classes. Things like Ireland's economy relying on higher interests rates to run properly than somewhere like Germany etc.

Basicly the only way the Euro would ever truely work would be if we became the United States of Europe, ala the boys over the pond.

Not going to happen until Adolf MkII takes over.

[Wills2]

Fittster said:

Major T said:

Fittster said:

Name a fiat currency that has stood the test of time.

http://georgewashington2.blogspot.com/2011/08/aver...

The average life expectancy for a currency is 27 years.

From the article: I name GBP.

The pound as a fiat currency goes back about 80 years.

The article seems to suggest otherwise;


The average life expectancy for a fiat currency is 27 years, with the shortest life span being one month. Founded in 1694, the British pound Sterling is the oldest fiat currency in existence. At a ripe old age of 317 years it must be considered a highly successful fiat currency. However, success is relative. The British pound was defined as 12 ounces of silver, so it's worth less than 1/200 or 0.5% of its original value. In other words, the most successful long standing currency in existence has lost 99.5% of its value.

Perhaps it was never a convertable currency although defined against silver, hence the fiat status suggested above?

[Jasandjules]

0a said:

Yes, I sat in an economics class back in the day arguing that you cannot shove divergent countries that have governments elected locally into a common currency. The only way it can work is if national governments are abolished and one economic and fiscal organisation runs the lot, with massive transfers between regions. You may or may not like that, but there is no way France and Germany will allow themselves to drop out of existence as an independent nation in any meaningful definition of the word.

I agree with you and have had the exact same arguments. It also falls somewhat flat when those countries are so diverse in their needs, and when they hate each other....

[Ozzie Osmond]

mrmr96 said:

Exactly. It works here because of the central governance. The only way it could possibly work in Erope IMO would have been with a single Government with universal tax/spending.

But that's not right any more is it, with devolution. Students in Englend pay £9,000 a year for university - in Scotland it's free. I understand some benefits are different in Wales. These places have their own parliaments and decide their own spending so I find it difficult to see the distinction from Eurozone.

[BuzzLightyear]

I discussed this with my Father (wise old bird that he is) at the beginning of the Euro and he predicted that it would fail due to the disparity between the different countries' economies: His analogy was pairing a racehorse with a carthorse.

Seems he was right.

The problem now is how much trouble all of the member states will have now and how much that will affect the rest of us...

I feel particularly sorry for the Irish who voted against it and were then coerced to accept it. Politicians! just glad we stayed out of it - although we'll suffer, it won't be as badly as it would have been had we signed up to it.

[JagLover]

0a said:

Yes, I sat in an economics class back in the day arguing that you cannot shove divergent countries that have governments elected locally into a common currency. The only way it can work is if national governments are abolished and one economic and fiscal organisation runs the lot, with massive transfers between regions. You may or may not like that, but there is no way France and Germany will allow themselves to drop out of existence as an independent nation in any meaningful definition of the word.

Same here

The Euro area is not an optimum currency area by some margin. This is due not only to the factors above but others such as limited movement of labour between member states.

As designed it would always fail once the first economic storm came along. Whether those who proposed it were ignorant of basic economics or viewed it as a step toward fiscal union is another matter..

[anonymous-user]

It was obvious before it became reality that it was doomed to failure.

We now just have to wait to see how much money will be wasted before the total colapse comes, which it will.

[Ozzie Osmond]

BuzzLightyear said:

my Father (wise old bird that he is) : His analogy was pairing a racehorse with a carthorse.

Seems he was right.

Hmmm. Wonder how Cornwall and City of London get along with the same currency?

[mrmr96]

Cheers for the input chaps - I'm glad it's not just me who saw this coming all those years ago.

Does beg the follow on question: that being i) why did no one else see this problem coming before the single currency was introduced? ii) or if they did see it coming, then why did they plough on?