Thursday, 16 August 2012

Two-Speed Euro aka the Moses Plan

It has been proposed before and it seems that it's back in vogue: Make a 2-speed euro. The idea is that richer countries like Germany, Finland, Luxemburg, Austria and others, should have an "expensive" euro, whilst Greece, Spain, Italy and others which face problems should be better off with a "cheaper" euro. I like to call this the Moses solution (think of what he did to the Red Sea). The rationale is that now, the Euro is too cheap for rich countries (whatever that may mean!), while it is too expensive for the poorer ones.

It is not the first time something like this has been proposed. The main problem in the Eurozone is non-integration and what is the brilliant solution of some economists? An idea that divides the EU even more. Remember what I said about economists and real life?

The idea is simply absurd: First of all what does it mean that a currency is too cheap for a rich country? I don't think that the Germans are having trouble sleeping because their exports have boomed, due to a falling euro. The same holds for all other "rich" countries. Second, what defines what a rich country is? Ireland was a rich country before 2008 but I don't believe that anyone would consider letting them in the "rich" country ghetto now.

As in the case of Ireland, a nation may be rich one year and in the next, faced with an unprecedented disaster (of any kind not just economic) may fall into the "poor" class of countries. What would happen then? Just change to the low currency and if the country gets back on its feet change back to the expensive one again? I do not think that the public would really much appreciate this, having to change their hard money every time the economy takes a downturn. The future is unpredictable and uncertain. No country can guarantee that it will be solvent and trustworthy in the future.

Another important consequence is that there will be a "rich country ghetto" in the Union. To be accepted into the rich currency you will have to be accepted by the already existing countries, which would breed political disputes. The same problems would occur when a country should be exited from the rich country union as nations would be reluctant to dismiss a country like Germany, even if it has sever financial problems.

What economists with no real-life experience fail to see is the infeasibility of a Moses plan and the disastrous consequences that it may have if it is applied. Now is the time for more union and more integration. Dividing the EU would be a step towards breaking it up. I do not think that if the South US states had a problem, Bernacke would divide the dollar into two. Why should we?

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