Wednesday, June 13, 2012

The Guy Who Wrote the Book on the Federal Reserve Has a Solution for the Euro

From The

Alan Meltzer has a solution for the euro
“Capitalism without failure is like religion without sin, it does not work,” had already said Allan Meltzer in 1969. Pittsburgh’s Carnegie-Mellon University teacher and author of the monumental History of the Federal Reserve is the same conservative who advised John F. Kennedy and Ronald Reagan. Under Clinton’s presidency he was in charge of a U.S. Congress committee that essentially claimed the end of the World Bank on the basis that the growth of many emerging economies would make much of development aid unnecessary.

Would you tell us what Europe should do? 
 Split into two euros. On one hand, we’ll have a ‘soft euro’ which would include countries like Italy, Greece, Ireland, Portugal and Spain. On the other hand, the ‘hard euro’. Periphery euro would float along with the central euro. The ‘soft euro’ currency would only be temporary. Countries that would adopt it should take advantage of devaluation to carry out a fiscal adjustment, and once their public accounts will accept it, they’d go back to the ‘hard euro’

Wouldn’t that mean a massive capital flight from that peripheral euro to the central one that would lead to impose capital controls first and then finally sink the value of the euro weak? 
No. Devaluation would be fast, and it could re-activate the fiscal policy.

What about the banks? What would happen to them?  
They would need public help. And German, French and other countries’ banks too, because their banks would go bankrupt. So countries would need to agree on a political consensus, mostly euro ‘hard’ countries would need to support the ‘soft’. And by supporting I not only mean intervene in markets, but also to design economic policies that favor monetary stability. Will it be painful? Of course.

But Europe will not leave this issue behind without suffering. But, of course, neither the Germans nor the French want to hear about injecting public money to their banks. The problem in Europe is that there doesn’t seem to be a political will to design any economic policy in a coordinated way. Look at production costs in Greece, Italy and Spain: they are between 30% and 20% higher than in Germany. Are you going to accept a Great Depression, with income cuts of 20% (in Spain) or 30% (in Greece) to recover lost competitiveness? No. Will Germany accept an inflation that would allow you to win 20% or 30% of competitiveness? No. One thing is clear: it will be very painful to get out of this crisis....MORE
HT: History Squared