The following short piece appeared in the European edition of the WSJ this
week
Marty Feldstein
*Still an Economic Mistake*
By Martin Feldstein
I continue to believe that the creation of the euro was an economic mistake.
It was clear from the start that imposing a single monetary policy and a
fixed exchange rate on a heterogeneous group of countries would cause higher
unemployment and persistent trade imbalances. In addition, the combination
of a single currency and independent national budgets inevitably produced
the massive fiscal deficits that occurred in Greece and other countries. And
the sharp drop in interest rates in several countries when the euro was
launched caused the excessive private and public borrowing that eventually
created the current banking and sovereign-debt crises in Spain, Ireland and
elsewhere.
But history cannot be reversed. Despite these problems, the euro will
continue to exist for the foreseeable future. It will continue even though
that will require large fiscal transfers from Germany and other core nations
to those euro-zone countries with large debts and chronic trade deficits.
One reason for the euro's likely survival is purely political. The political
elites who support the euro believe it gives the euro zone a prominent role
in international affairs that the individual member countries would
otherwise not have. Many of those supporters also hope that the euro zone
will evolve into a federal state with greater political power.
There is also an economic reason that the euro will survive. While
hard-working German voters may resent the transfer of their tax money to
other countries that enjoy earlier retirement and shorter workweeks, the
German business community supports paying taxes to preserve the euro because
it recognizes that German businesses benefit from the fixed exchange rate
that prevents other euro-zone countries from competing with Germany by
devaluing their currencies.
The euro will not only survive but will likely continue to increase in value
relative to the dollar as sovereign-wealth funds and other major investors
shift an increasing share of their portfolios to euros from dollars.
Those investors had been quietly diversifying their investment funds to
euros before the crisis began in Greece. They stopped temporarily because of
uncertainty about the future of the currency. But they eventually came to
recognize that the problems of the peripheral countries were not a problem
for the euro and should be reflected in country-specific interest rates
rather than in the euro's value. The result was a rising euro and a renewed
shift of portfolio balances to euros from dollars. As that process
continues, the relative value of the euro will continue to rise.
*Mr. Feldstein, chairman of the U.S. Council of Economic Advisers under
President Reagan, is a professor of economics at Harvard University.*
*
*
Received on Mon Mar 07 2011 - 21:28:34 EST
