Arnold Kling  

Optimum Currency Areas

PRINT
Job-Creation Arithmetic... Comment of the Week, 2003-04-2...

Martin Feldstein explains why Europe is not an optimum currency area, even though the United States is one.


First, American employees move within the country when demand is relatively weak in a particular region, facilitated by a common language and a culture that regards moving across the country as perfectly normal. Germans are not leaving Germany in large numbers for areas of Europe with faster growth or lower unemployment. Second, wages are much more flexible in the US than in Europe, reducing the decline in regional employment that occurs when demand falls. And third, the US has a federal fiscal system that directly offsets about 40 per cent of the relative decline in any state's gross domestic product by a lower outflow of taxes to Washington and a higher inflow of transfer payments. European fiscal systems are still largely national.

After reading Feldstein's piece (which I found while browsingStephen Kirchner), I recommend this illuminating discussion between Nobel Laureates Robert Mundell and Milton Friedman. Mundell was optimistic that a currency union will lead to greater price flexibility and more deregulation in Europe. Friedman was more concerned about the possibilities that Feldstein observed.

For Discussion. Do you think that there is still a chance that the euro will force wages and prices to become more flexible in the participating countries?



TRACKBACKS (6 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/2
The author at Asymmetrical Information in a related article titled How good is the Euro for Europe? writes:
    Arnold Kling has a nice post on the EU, and whether the currency zone is going to work. I had [Tracked on April 23, 2003 10:46 AM]
The author at DILACERATOR in a related article titled Monetary union and economic flexibility writes:
    The question whether the euro will in the long term benefit Europe or harm it cannot be answered at this... [Tracked on May 7, 2003 5:10 PM]
COMMENTS (4 to date)
David Thomson writes:

"Do you think that there is still a chance that the euro will force wages and prices to become more flexible in the participating countries?"

Yes, about the same chance as does a snowball in hell! The Old Europeans are similar to alcoholics who will not seek help until they have hit bottom. Socialism is a vile intellectual virus that turns its victims into the proverbial frog who fails to realize that it is slowly being boiled alive.

Eric writes:

I don't know about wages, but the Euro has already done much to make prices more transparent across borders.

It used to be that the prices of vehicles were very different in, say, Italy compared to France. The reasons were no different than why you can get a Chrysler in Canada a lot cheaper than you can in Detroit: the Canadian dollar is a weakling, Canadians just aren't as wealthy as Americans are and so are more price sensitive, etc.

But these days, auto prices in Italy have to be similar to those in France, because of the Euro. The same thing would happen if Canada got rid of its wimpy currency and adopted the US dollar.

Factory writes:

The first point made by Feldstien, in theory, should be catered for by the political and social intergration of the EU, with English being the most obvious common tongue. This can already be seen in the IT industry where English is quite common, and workers are quite easily able to work in different countries.
As for the second point, it's unlikely at this point in time that Europe will make any ideological shift towards workplace relations as is seen in the US. Assuming a normalizing of industries across Europe, one would expect that there would also form interstate unions.
So to answer the discussion point, I would say that wages and prices would prolly not become substansially more flexible, merely because the social and political forces that work to remove certain kinds of flexibilities will still exist.

David Thomson writes:

"So to answer the discussion point, I would say that wages and prices would prolly not become substansially more flexible, merely because the social and political forces that work to remove certain kinds of flexibilities will still exist."

In other words, the Old Europeans are really in a serious mess---and things will likely get far worse before they get better. Junkies have an overwhelming urge to satisfy their addiction. On top of that, they haven’t the slightest bit of honor, nor moral decency.

Do I wish them ill? Nope, because their problems also hurt us. I simply doubt if anything truly positive will occur anytime in the near future. Once again, a junkie must often hit bottom before seriously seeking help.

Comments for this entry have been closed
Return to top