The euro isn’t as bad as we all thought

by on May 9, 2017 at 11:40 am in Current Affairs, Economics, Political Science, Uncategorized | Permalink

It still was a mistake, most of all for Greece and Cyprus.  Yet overall its prospects are looking up, as I argue in my most recent Bloomberg column.  Here is the most revisionist passage:

I now think of the 2008-2012 period as unwinding a long-term bubble of overinvestment in the EU periphery, and thus those were special circumstances when virtually all economic policies were radically underperforming. Given that a recurrence of such conditions is unlikely, the euro will do much better in the future.

Along related lines, compare the performance of fiscal austerity now with that earlier period. Greece has been going through an unprecedented fiscal adjustment, with a primary surplus running at 3.9 percent of gross domestic product; yet Greek output, while ailing, has remained roughly stable. Portugal has been cutting back drastically on public sector investment, dropping its public sector deficit from 4.4 percent of GDP to 2.1 percent. Rather than imploding, the economy grew by 1.4 percent.

Of course, fiscal austerity didn’t perform nearly as well in the earlier part of this decade, and neither did the euro. The economic implosion from the unwinding of the bubble was simply too strong, so we should not overgeneralize from the very negative performance during those years.

Here is the most important passage:

One of the original goals of the euro was to tie countries to the European Union and its rules for free trade and free migration. The major EU country that eschewed euro adoption, the U.K., has now voted itself out the union altogether, to its detriment. Estonia and Latvia, which adopted the euro in part for political reasons to tighten their bonds with the EU, still seem secure against potential Russian aggression. The biggest political trouble spots seem to be Hungary and Poland, neither of which are euro members. That may be a coincidence, but it may also reflect a very real psychological tie resulting from the currency adoption.

Do read the whole thing, there are several other arguments at the link.

1 Brian Donohue May 9, 2017 at 11:54 am

I think there was some confusion (as indicated by yield convergence) over who was underwriting sovereign risk that has since been clarified (divergence in yields). That helps.

It’s not clear why a monetary union would require, say, Germany to underwrite Greece any more than the US underwrites Panama, but people thought that, which produced a lot of overlending.

It’s even less clear to me why a monetary union would provide military protection against Russia, but I think talk of Russia invading the Baltics is pretty lunatic anyway.

For countries that don’t trust themselves to make supply side reforms, the discipline associated with lack of monetary control might be a good thing in the end. But Greece has suffered a lot.

2 Anonymous May 9, 2017 at 12:13 pm

Tyler’s Euro piece is pretty good, and as you say some issues have been clarified.

One thing clarified is that democracies are in conflict with autocracy all around the world. This has replaced “Islam” as the central conflict of our times. Assad, for instance, being less Muslim and more Tyrant.

Which leads to odds and the Baltics. How should they be assigned? Democracies can be counted to pursue national self-interest, however imperfectly. Autocrats have less predictable goals. Why should Assad keep using the gas? What is he thinking? Why should Putin kill journalists or wage a faux revolution in Ukraine? What is he thinking?

Not something argued in any Congress. Not something I would claim to predict.

3 Troll Me May 10, 2017 at 1:14 pm

It was proposed that the fact of being in the monetary union had a psychological effect regardless of not being in the political union.

Anyways, they are NATO members, so yes, euro zone questions are not highly related Russia risks in that sense. (Although certainly there may be common forces working against both. For example, opposition to a shared currency and opposition to the political union are probably in common. And both of which are related to risk factors related to Russian efforts to expand their loving touch across larger swathes of Europe.

4 rayward May 9, 2017 at 11:54 am

I believe the expression is sleight of hand. Here, Cowen compares the economic performance of austerity today with the economic performance during the great recession and concludes that austerity ain’t that bad. Compared to death by hanging, death by drowning ain’t bad. On the other hand, I’ll take springtime in Paris over death by drowning.

5 Jacques René Giguère May 9, 2017 at 5:24 pm

According to my old English criminal law prof, hanging (long drop) would be far better than drowning…

6 Thomas Sewell May 11, 2017 at 4:32 am

I’d be interested in Scott Sumner’s take on “fiscal austerity didn’t perform nearly as well in the earlier part of this decade”. I suspect he’d have some pretty good arguments with that statement, and data to back them all up…

7 inertial May 9, 2017 at 11:56 am

“Estonia and Latvia, which adopted the euro in part for political reasons to tighten their bonds with the EU, still seem secure against potential Russian aggression.”

Martian aggression as well.

8 Borjigid May 9, 2017 at 12:26 pm

Tell that to Ukraine or Georgia.

9 Richard A. May 9, 2017 at 12:42 pm

It’s strange how Ukraine refugees head east or south to Russia and not west to Kiev.

10 Captain Obvious May 9, 2017 at 12:44 pm

You mean ethnically Ukranian or Russian?

11 Anonymous May 9, 2017 at 12:45 pm

Where did you hear that one? Seriously. Breitbart or something? Maybe a Russian Facebook Bot?

12 Milo Fan May 9, 2017 at 1:03 pm

They are going in both directions.

13 inertial May 9, 2017 at 12:49 pm

I wish I could.

The thing I’d tell Georgia is, don’t attack Russian peacekeepers, it can’t end well. To Ukraine, I would say, don’t overthrow elected governments, don’t piss off millions of people who are not up with your program, and if you do piss them off, don’t start civil wars against them.

14 Harun May 9, 2017 at 2:11 pm

Also, keep your nukes.

15 inertial May 9, 2017 at 2:33 pm

Neither of them ever had nukes.

16 Borjigid May 9, 2017 at 3:19 pm

Ukraine had nukes from independence through 1994.

17 MikeP May 9, 2017 at 8:15 pm

Russian peacekeepers. Interesting.

18 inertial May 9, 2017 at 12:39 pm

Seriously though, the single biggest service “tightening the bonds with EU” did for the Baltics was to empty those places of people. On the other hand, when all Latvians finally move to London, the threat of Russian aggression against them will be eliminated forever.

19 Captain Obvious May 9, 2017 at 12:45 pm

+100 .

20 Troll Me May 10, 2017 at 1:16 pm

After 50 years under Soviet rule, unwelcome Russian intervention seems somewhat more plausible than that from a distance planet which may not even have bacterial life.

Do you support post-Soviet expansion into Eastern Europe, or is your head really stuck that deep in the sand?

21 Aidan May 9, 2017 at 12:00 pm

I think a good test for any argument as to why the euro is doomed to failure, is that it has to explain the particular failing of the currency and why that failing didn’t apply to earlier phases of European integration. E.g. “The different European powers will never agree to sacrifice their particular interests for common ones”, “There’s too much cultural difference between X group of European countries and Y group of European countries” and “It’s misusing economic policy for poltitcal ends” are all good arguments for why the euro can’t possibly work, but they are equally good arguments for why the European Coal and Steel Union and the Common Market can’t possibly work, and both of those are still holding remarkably strong.

22 Borjigid May 9, 2017 at 12:27 pm

Googling “Optimal Currency Area” is a good start.

23 Aidan May 9, 2017 at 1:35 pm

Indeed, it’s self-evidently true that you can’t create an optimal currency area by putting the cart before the horse and placing all the European countries together in a currency union and then giving them no other option but to create something approaching an optimal currency area, or perish in the attempt. But then it was also self-evidently true that France and Germany could never be tied together politically by putting them into a single market for coal and steel, as they’d been busy fighting one another for centuries. The United States is pretty far from being an optimal currency area (e.g. rural Mississippi and urban San Fransico are rather different) but it still seems to work quite well as an economic and political entity. The project of European integration has repeatedly shown itself to have massive support over the decades since it began and has been able to overcome a great many seemingly impassable obstacles on the way.

24 Millian May 9, 2017 at 4:58 pm

Some people had a theory, then their foolish followers didn’t bother following up by testing it against the practice. Economics used to be a science.

25 Peldrigal May 12, 2017 at 11:15 am

Nobody has ever persuaded me that the United States of America is an Optimal Currency Area. Or the Federal Republic of Germany.

26 Axa May 9, 2017 at 12:04 pm

The case of Portugal may be the most interesting. Austerity did not ended in a catastrophic collapse of living standards. Education and health systems keep working. Reforms are painful but possible on the long term.

Ps. It should be funny to bash Tyler’s hypothesis of Euro being a defense for Estonia and Latvia. However, remember a part of Ukraine is still occupied by Russia.

27 Anonymous May 9, 2017 at 12:25 pm

The very insidious thing about this conflict, democracy vs autocracy, is that many Americans (up to and including the President) have become enamoured with the enemy.

For too many, being strong has become more important than being virtuous.

28 AlexT May 11, 2017 at 6:48 am

>Implying that the West is virtuous towards the rest of the world. Or democratic for that matter.

29 Captain Obvious May 9, 2017 at 12:42 pm

“Austerity did not ended in a catastrophic collapse of living standards.” Oooh Really? You know how many people left the country since it entered the eurozone?

30 Axa May 9, 2017 at 1:13 pm

Portugal has already seen two population decays between the 1960s and the EU (1999). Compare the Eurozone dip to the dictatorship dip for some context

The disastrous effect of the EU has been that the fraction of Portuguese emigrants that stays closer to home in Europe is higher today (65%) compared to 1990 (54.5%) . Put on the shoes of a Portuguese worker, what’s worse? Working on Switzerland, Germany or the USofA? None of them is the “best”, but surely there’s a worse.

31 lbc May 9, 2017 at 12:16 pm

companies and people are also a more comfortable making investment in euros than in, say, latvian lats.

32 Borjigid May 9, 2017 at 12:28 pm

We thought the euro was very bad.

33 spencer May 9, 2017 at 12:29 pm

Maybe the biggest error economist and investors have made over the past years is to underestimate Europeans commitment to the Euro.

34 Captain Obvious May 9, 2017 at 12:49 pm

A really bad column, starting from the subtitle. And this: “What’s the new evidence? For one thing, geopolitics seem to be favoring the euro. France, the Netherlands and (soon) Germany are rejecting at the voting booth far right and populist parties that oppose the European project. ” Which new evidence? Was there any time since WWII, when these countries didn’t reject far right parties? Maybe he is talking about some parallel reality? .

35 Milo Fan May 9, 2017 at 1:07 pm

He’s just signaling.

36 chip May 9, 2017 at 4:21 pm

Yep, he has it exactly backward. Populist and far-right parties have emerged and grown in the EU.

And anti-EU sentiment in general in France, the Netherlands and Germany is significant:

Voters are rejecting the early fringe parties that represent an exit from the EU. But there is no way to look at the data and think that geopolitical trends are favoring the EU.

Tyler is obviously a very smart guy. But (increasingly?) he seems to write from feeling rather than even the most cursory research.

37 Alistair May 10, 2017 at 8:05 am

I have a lot of respect for our host on this site, he is indeed very smart.

But I have learned that feeling can twist the minds of very smart people as readily as very dumb ones. So I increasingly seek out those most devoid of sentiment or perhaps most drawn to ugly thoughts, rather than the smartest.

38 Alistair May 10, 2017 at 7:55 am


The populists increase their vote share year-on-year and country by country, but as they don’t (yet) command majorities, they have been “rejected”. 40% of French votes to Le Pen or are spoilt in disgust, and they proclaim a triumph of social democratic health. Another such victory and they are lost.

There’s a total failure to look at trend rather than mere instances. Is the EU centrist situation better than it was 5 years ago? 10? 20?

39 collin May 9, 2017 at 1:26 pm

Despite the article being a little smug about the latest European elections, I really do wonder if the reason for such a landslide Macron victory was Le Pen was completely at sea about economics in France. At rallies complaining about EU and Euro sounds good, but it does create unknowns for many left/right centers who work jobs that interact with foreign trade and whose retirement savings are in Euros. Le Pen discussing Capital Controls probably hurt a lot possible right center voters thinking about their retirements dropping 10 – 15% over night.

40 The Other Jim May 9, 2017 at 5:33 pm

One does have to laugh loudly at the fact that the only Dem “victory” in six months is that the French elected a Socialist.

Huzzzah! Great comeback from Nov 8, kids!!

41 msgkings May 10, 2017 at 12:50 am

LOL Le Pen is FAR more socialist than Macron. It’s not even close.

42 prior_test2 May 9, 2017 at 1:29 pm

What ‘we?’ Your loyal readers, or the disloyal ones?

43 A Black Man May 9, 2017 at 2:56 pm

Because you were wrong before, you’re right now. Not even a hint of self-awareness.

44 The Cuckmeister-General May 9, 2017 at 3:21 pm

Are you the same Blackman who cucks all the other Commentors here?

45 chip May 9, 2017 at 4:35 pm

“Estonia and Latvia, which adopted the euro in part for political reasons to tighten their bonds with the EU, still seem secure against potential Russian aggression.”

Is the inference here that EU membership secures them from Russian aggression? Strange if so considering that they are members of NATO and the recent build-up of NATO forces in the two countries were led by the UK in Estonia and Canada in Latvia.

The UK, Canada and of course the ever-present US are of course not in the EU’s future.

Would Germany defend the Baltics? Here’s the German parliamentary ombudsman on their military:

Bartels found that only 38 of Germany’s 114 high-tech Eurofighter jets are operational, Deutsche Welles reported. It also has 93 Tornado fighter jets, but only 29 of them work. The number of German soldiers was around 600,000 at the end of the Cold War in the early 1990s. Today the country has just 177,000.

46 chuck martel May 9, 2017 at 7:36 pm

Dumping billions of dollars in defense spending to successfully counter the Soviet concept of socialism doesn’t mean peace with the European-Asian frontier. No, the Russians are still the enemy. Because states need an enemy to direct the passions of their citizens against the other rather than dwell on their own failings.

47 Matt May 9, 2017 at 5:57 pm

“I now think of the 2008-2012 period as unwinding a long-term bubble of overinvestment in the EU periphery, and thus those were special circumstances when virtually all economic policies were radically underperforming.”

I would say that the overinvestment bubble was an effect of the euro, where periphery debt was perceived as safe, in part because its value couldn’t be inflated away and in part because the european governing structure would not allow default.

I don’t know what we’ve seen that would change those conditions. Inflation has consistently remained below projections, and the ECB moved towards fiscal tightening before any of the other big national banks. The EU/ECB/IMF has consistently acted to protect investors at the expense of peripheral economies, even in the face of overwhelming democratic backlash. I don’t see what keeps captial inflows from sloshing back into Greece as soon as the recovery picks up.

48 Emanuel Noriega May 9, 2017 at 6:53 pm

The purpose of the EU is to prevent Europe from being the cite of another major war. Tying countries together slowly reduces their national identical that could otherwise develop into dischord.

49 Milo Fan May 9, 2017 at 7:10 pm

The euros got their ass kicked during wwii, so it makes sense that they want to reinterpret it as them deciding to give up on war. But why are you repeating it?

50 Steve Sailer May 9, 2017 at 9:52 pm

That’s why non-Euro Switzerland, Bulgaria, Croatia, Czech Republic, Denmark, Hungary, Poland, Romania, Sweden, Norway, and the United Kingdom are on the verge of invading France.

51 msgkings May 10, 2017 at 12:51 am

He said EU not Euro. It’s ok, lots of people make that mistake.

52 Ricardo May 10, 2017 at 2:24 am

Also, Switzerland and Norway are participants in the Common Market and Schengen Agreement. They even have their own EU-like bureaucracy in Brussels. About the only substantive difference between them and full EU members is the ability to negotiate trade agreements on their own.

53 Alistair May 10, 2017 at 8:10 am

One might think that those countries being democracies would alone be sufficient condition for their mutual peace?

Given we have such a parsimonious and wider explanation for the European peace, ascribing “peace” to EU membership looks like sloppy thinking.

54 Steve Sailer May 9, 2017 at 9:50 pm

The Euro was a bad idea to adopt in the first place, but maybe it would be so destructive to un-adopt it that Europeans are stuck with the damn thing. So, politically it was a brilliant Ratchet Effect: You can check out any time you like but you can never leave.

55 carlospln May 9, 2017 at 10:57 pm

You completely omit the Euro’s greatest failing, that there is no compunction to recycle the current account surpluses of the Northern countries back into the countries of the South, first raised by Gwynn Davies in 1992.

But its all good, because the ‘right’ candidates won in a couple of elections?

Economics truly is the justification of the status quo, underlined by your tortured logic.

56 Noah Carl May 10, 2017 at 2:56 am

The Greeks and Italians are going through a Great Depression:

57 Ricky Tylor May 10, 2017 at 4:37 am

The scenario with Euro at the moment is indeed steady. I believe it is impossible for anyone to talk about future with guarantee, so it is important to just work with proper way. I always trade with good money management, it helps a lot through broker like OctaFX since they are special with having low spreads from 0.1 pips for all major pairs, zero balance protection and daily market updates, it’s all terrific for us and allows us to work smoothly.

58 blades May 10, 2017 at 2:22 pm

Umm, TC, the pound has retraced its path back to essentially the pre-Brexit vote price. So how would you update your linked article to account for this?

59 matt May 10, 2017 at 6:08 pm

umm, that is not true. Pre brexit pound ~1.45 (and well before the vote ~1.55). Bottomed out at 1.20, currently 1.28.

60 Blades May 10, 2017 at 9:16 pm

Umm, sorry. You’re obviously right. Got confused by the euro/pound chart in the linked article.

61 Unanimous May 10, 2017 at 6:21 pm

Greek GDP is still dropping as far as I can see.

62 Unanimous May 10, 2017 at 6:41 pm

Okay, not dropping anything like it was 2009-2013, probably could count it as stable.

GDP per capita is going up. Population is dropping. Unemployment down to 23%. Happy days.

63 Jorod May 10, 2017 at 9:42 pm

Good to know all is well in Ukraine and Georgia.

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