Economics 101: Why the Euro can't work?

User avatar
pig party

Post   » Tue Jul 21, 2015 7:19 am


OK - here's a senario....

At the moment the States in America move stuff backwards and forwards between each other, in a kind of inter-state import/export business. For the initial purposes of this senario I am purposely ignoring international business for the moment, for the sake of simplicity. My arguement is that this works because there is a central bank AND a common tax policy (lets assume for the moment that it is fair).

So, to make it more like Europe is now, and to understand why the common currency can't work, lets imagine that you leave the dollar in place as common currenc, but leave each state completely independent in terms of a bank, tax system and public spending.

I am going to very stereotypically borrow Texas, California and Michigan and use them as horribly oversimplified examples (sorry), purely for simplicity's sake.

So - Texas exports oil to California and Michigan, who thus give Texas lots of money. This money then leaves Texas when it imports stuff from other states. In this example say it buys oranges from California. It wants nothing Michigan has; neither does California.

In this exagerated example the outcome is obvious. Texas gets rich, Californians work longer and harder to produce more oranges (until saturation point is reached - how many oranges can you eat??) and Michigan? Well, people who can go somewhere else.

So how does different currencies make a difference? Well, say Texas is raking in export money the value of its currency rises. (People in other states need Texan currency to purchase the oil, so as the demand for currency rises, so does its value). That forces Texas to bring the value of its currency down, either by importing more stuff or investing in poorer states. Texas starts demanding other fruits from California, for example, or sets up businesses in Michigan where investment costs and wages are lower.

All the while this toing and frowing keeps the system more balanced. So now on top of this basic system you can examine how additional influences such as tourism or international trade, for example, play out, and introduce measures to create or sustain balance and wealth distribution.

However, the Euro is stuck in the worst possible place. One currency for a group of countries who are essentially independent when it comes to every other economic area. Just like the first senario. Just substitute Texas for Germany, California for France and Michigan for anywhere else in Europe currently floundering.

Even if you start from a level playing field, remove personal opinions and motivations, even if devoid of any emotional or emotive policies, it doesn't work. It can't work without a single currency AND a single tax and public spending system.

Now, I have never studied economics. I did study maths but to state 'it doesn't come easy to me' is to overstate my mathematical ability in a big, big way. So my question, to those who know much better than me, where is this 'model' wrong?

I know it is wrong because I have been trying to explain it to some folks who are insistent being in the Euro is better. They haven't however got any convincing contradictory aruements. I know my senrio is horribly oversimplified, but at its very basic level what am I missing? Someone with more brains and insight than me, give us a leg up will you and set me straight.

User avatar
Lynx
RESIST

Post   » Tue Jul 21, 2015 9:10 am


I think it makes some sense but I am not an economist. The person I most admire is Paul Krugman. Here are some notes he wrote recently on the euro:

http://krugman.blogs.nytimes.com/2015/07/06/scattered-notes-on-the-euro/?_r=0

As for the states, they actually do each have their own taxing authority but also the federal government does. Looking at the distribution of money around the country for various services, more goes to southern, republican states than is sent by individuals and corporations from the Northern states. So effectively New York, for example, subsidizes services in Missouri. This helps people live better lives in poorer states where they are not making as much and need more.

The irony is that many republicans vote against their best interests and elect people who take more and more away from them. We are all manipulated by our beliefs.

Out of curiosity, are you considering a system by which the european countries become states with control over themselves but with an overall taxing authority on all countries to cover certain services that is supported evenly by income so poorer countries would only pay in relation to how much is earned?

Talishan
You can quote me

Post   » Wed Jul 22, 2015 6:28 am


Pig party, your scenario is not at all wrong. Those who have said (some, all along) that the euro would never ultimately work use just such a scenario as yours.

The idea, overall (and I am pretty good at maths but not a trained economist by any means) is that if you have a common currency, you need to have a common fiscal policy -- that is, a more-or-less equal-ish, or consistent-ish, view on how to raise it and how to spend it.

If you have a common fiscal policy, you need to have a common social, political and economic policy -- that is, a more-or-less equal-ish, or consistent-ish, view on how society should work (in only the most broad and overly simplistic sense).

The US has, traditionally, states whose policies tend more to the left (I'll pick Massachusetts), and states whose policies tend more to the right (I'll pick Wyoming, say). But neither Massachusetts nor Wyoming, in the biggest sense of the word, veer too terribly far from what the US believes, and how it conducts itself, "in general". Again, this is a relative concept, and a concept of scale, but while many US states' majority populations have differing views on state finances, federal finances, and "how things oughta be" in general, it falls within a range of center gray. No US state has a communist (used in the ideal sense, like an Israeli kibbutz, say) way of life, nor a truly dictatorial, fascist way of life, such as some Arab nations have labored under in the recent past.

At least most, if not all, US states have a balanced-budget clause or amendment in their state constitutions. That is, unlike eurozone countries, US states can't issue bonds to borrow money. (Municipalities and agencies can; you can buy bonds issued by cities to help construct a jail, say, or bonds issued by an agency building a dam, say. But not a state, at least as far as I understand it.)

The European Union is not a country in and of itself, and that's part of the "problem" (if you are a believer in the euro). It has a central bank (check), and a parliament (check), and a president, at least in position. But each "state" (European member country) has its own central bank, its own fiscal priorities, its own political priorities and its own taxing policies. Each can take on debt to raise money by issuing bonds, which the US federal government may do (and does, in spades) but each US state may NOT.

The federal tax and budgetary systems oversee, and facilitate, transfers between wealthier areas and poorer ones in the US on a national basis. While individual people might rant about it if they knew about it -- someone in Texas might say, "Why should my money help out someone in Michigan??" -- it isn't that simple or that obvious. The Texan pays federal income tax, and our legislators pound out a federal budget on how to spend it. Let's say there's line items in those budgets for 1) a pre-k program for at-risk youth and 2) an expansion to an existing military reserve facility.

The Texan's tax dollars go to Michigan -- not directly, but because, for the sake of example, there are more at-risk youth in Michigan and the pre-k program is bigger there, and the military reserve facility is in Michigan.

Michigan's youth (hopefully) get some help, and the economy local to the reserve facility gets a boost by contractors, equipment suppliers, and everyday workers getting work and payment through the federal government contracts let to expand the military base. (Ask the Texan and he'd probably say he'd rather the base have been in Texas, but a strong military is important no matter what, so the military contract is fine with him. Ask him about the pre-k program and he'd probably say that's worthless, and write a nasty letter to his congressional representative -- and that'd be it.)

There's no mechanism to make these types of "transfers" in the European Union.

Your scenario outlines all the benefit of a floating currency. If the euro were abolished, Germany's mark would become easily the strongest and most dominant currency -- which would mean German exports would become extremely expensive for the rest of the world to buy and understandably, they don't want that. Greece's drachma would be worthless at first, but then folks in Germany, Japan, the UK and the US would realize that hey, I can take a month's vacation in Greece for, like, $1.29 per day (airfare excluded ;-), and buy olives for £0.02. In theory that means a LOT of folks would buy olives and come visit, bringing economic activity -- which helps individuals have jobs and earn money, but which also generates tax revenue -- to Greece.

In theory. Most opinions I've read say that shipping, tourism and agricultural exports aren't sufficient to really "do" this, should Greece exit the euro.

Lynx, you have a good idea but to have an "overall taxing authority", you're gonna have to have an "overall political authority" -- a powerful, central European government. Not everyone in the EU likes that idea, and I can see their problems with it.

So how does the US get away with a massive national debt? Because, basically, we are solvent (at least for right now, depending on your point of view). We can issue T-bills, have the Chinese buy them, and fund the pre-k intervention program and the military reserve installation expansion. But our own Treasury can buy those T-bills, too, because the money is available to both pay them at maturity AND buy them (back, sorta). The Fed can lend money to other banks (and they do, lots of it).

Greece doesn't have that option because their federal treasury is bare. No one will buy their bonds because the perceived chances of getting full value (or any value!) at maturity is presently so low. So they have no one they can borrow from to help get funds moving around through their economy except the ECB and IMF. And money moving around is what generates taxes, and jobs.

I am NO expert and some of what I say here may very well be very wrong. Those who know better than me, please post and correct.

Most Greeks want to stay in the euro because they want to stay civilized. They want to stay Western. They want to stay European. They do not want to become a Somalia or a Chad, and the risk of becoming a third-world nation, albeit one with sun, beaches, thousands of years of democratic, philosophic and civilized history and world heritage sites, in the short run if the euro is dropped is a very real one.

Talishan
You can quote me

Post   » Wed Jul 22, 2015 6:46 am


*Correction: our own Federal Reserve Bank can buy the T-bills. The Treasury issues them.

User avatar
Lynx
RESIST

Post   » Wed Jul 22, 2015 6:51 am


That's a good explanation, Talishan.

By the way, Texas is right in the middle of being dependent on federal funds. Michigan, with all it's problems is currently at #16 (less dependent).

This cool page displays graphically the breakdown, and has the numbers too:

http://wallethub.com/edu/states-most-least-dependent-on-the-federal-government/2700/

It took me a while to come around to the idea that governments are not like families and going into debt can be a good thing (spending money on a stimulus, for example, to pull the country out of near depression can only be done by a government - austerity won't help anyone). I had voted for Ross Perot years back (for me it was the balancing the budget that was so important) but would not do so now.

Talishan
You can quote me

Post   » Wed Jul 22, 2015 7:26 am


*snort* Georgia, 37. *snort*

I will say I think our Republican governor ... isn't as bad as I thought he was to start. :-/ He's handled some things better than I thought he would (which wasn't saying much), but he's still no match for his predecessor, who I thought was awesome (even though nicknamed Sonny).

Debt isn't a bad thing. Too much debt, and/or reckless debt, and/or debt without thinking about how you're gonna pay it back, is a bad thing. You really don't want, IMO, a federal balanced budget amendment. That'd be like running a good-sized household with no credit cards. Even the best-run household -- that pays all its bills on time, budgets and spends wisely -- can still use a vehicle for handling a truly unforeseen or truly impossible-to-save-for emergency. Without responsible debt, no one except the extremely wealthy would have a car or a house, and that, in turn, impacts the rest of the economy. (If you don't have a house, what's the point in saving, for example, to remodel your kitchen? If you don't save to remodel your kitchen, and then do it once you have reached your goal, that's work a home improvement contractor does not get, taxes he does not pay, and things, in turn, that he does not buy.)

"Money" doesn't matter, as weird as that sounds, as much as money moving around matters.

The other thing is that federal tax revenues vary greatly. It's extremely difficult for someone selling on straight commission, for example, or a self-employed graphics artist, say, to develop a household budget. How much are you going to earn that year?? You can't set up a solid budget with NO idea of revenue. The federal government needs the flexibility of being able to borrow (issue debt) if needed, and then to run a surplus (believe it or not, that's actually happened once or twice ;-) if possible.

User avatar
Lynx
RESIST

Post   » Wed Jul 22, 2015 7:49 am


What I learned was that you can't compare a family budget to the federal budget. That is where I failed years ago. Being a responsible person who avoided debt, I didn't want to see it in the federal government. But sometimes it is only the government that can fix a bad economy and they need money to do so.
(primitive economic theories!)

Talishan
You can quote me

Post   » Wed Jul 22, 2015 8:01 am


Not primitive, just Keynesian. IMO Keynes will only take you so far (without getting into a lot of political and economic opinion stuff that is not the point of this thread).

Brambles

Post   » Wed Jul 22, 2015 8:17 am


I always felt that besides the economical, the euro had a very large political motive. It was one of the first signs, for the general public, that we did have and could have a unified Europe. Only for that reason economical criticism of the euro should be taken lightly, and more as a way to improve rather than to abolish the euro. I'm a firm believer that a unified Europe, with the borders eliminated, could weaken all those silly nationalistic tendencies and solve the issue with immigration Europe has been dealing with.

But hey, I've been called a dreamer ;).

(On a personal level, I like not having to change coins every 2 hours of driving!)

Talishan
You can quote me

Post   » Wed Jul 22, 2015 9:41 am


" ... and more as a way to improve rather than to abolish the euro. I'm a firm believer that a unified Europe, with the borders eliminated, could weaken all those silly nationalistic tendencies ..."

Agreed 100%. It shouldn't have to be just a dream; that's the entire idea behind the European Union.

SardonicSmile

Post   » Wed Jul 22, 2015 12:08 pm


Please explain how you think Europe can be unified?

How do you eliminate borders?


Should we in the Netherlands get rid of for example our minimum wage because other countries do not have it? Or lower it so it is the same as in say Greece (because Greece is a hot topic)

http://www.eurofound.europa.eu/observatories/eurwork/comparative-information/minimum-wages-in-europe


How do you see this "unified Europe" ever work?

User avatar
pigjes
Cavy Comic

Post   » Wed Jul 22, 2015 12:31 pm


Belgium is a tiny country, with 3 sets of laws: one for Brussels, one for Flanders, one for Walloon. They can't get along one bit and as a Flanders person, have to admit our people are MUCH to blame. If such a tiny country can't even get along, I do not see borders fading soon.

It's sad, very sad. I would love a unified Europe, but if they keep taxing the hell out of everyone, adding more and more annoying laws to irritate people, it's never going to work. Especially, if every country, even parts of countries, can interpret them as they please, which creates a lot of discrimination. Flanders is "law-nuts" and just makes matters worse, for example.

The Euro, on the other hand, has been working reasonably since it was used.

SardonicSmile

Post   » Wed Jul 22, 2015 1:22 pm


The Euro isn't quite working either, hence the printing of extra money. It is also partly to blame in the Greek crisis, no way to devalue their own currency to stimulate the economy. (I don't know if I used correct economic terminology here, but that is what I read, only simplified)

It is nice that we don't have to do the whole currency exchange, but it never bothered me to have to do it, I even prefer it to the mess "Europe" is in right now.

Brambles

Post   » Thu Jul 23, 2015 7:56 am


I'm from Belgium too (hallo ;) ), and also from the northern flemish part. It's just -because- these guys believe we should split up the country, that we should eliminate the borders. We should never have split up Belgium in the first place, and ignored all those guys that feel threathened so much by the other culture, as to put up an imaginary line through the country to mark where who could speak which language. In Belgium, people have so little issues that the only issue they can grab on to, is the other person... and the nationalistic parties, to propagate themselves, are all too happy to provide that stranger. But, if I mention this view to my fellow flemish, I'm told that, if I believe that, that I'm not really flemish. Hah, as if there's one way to be a certain identity (because still, Flanders is still ONLY a region, not a country, thank god for that!)

National identities are like religion, they're labels and guidances given to you so you can guide your habits and feel secure in a larger group. They get partly defined by being different and in meeting the stranger, in Flanders case, the walloons and the foreigners. (That being said, living in Venezuela I define myself as European and Belgian.)

So I agree with Pigjes where it concerns the problem of "adding more and more annoying laws to irritate people, it's never going to work.", both concerning what happened and is still happening in Belgium, and what could happen in Europe. It's as if we decided, as Europeans, on beforehand, that we wouldn't get along... and then, while trying to work out how to unify Europe, making up rules and norms on how to get along better in the future. Extremely simplified, obviously, but I believe a better base for starting an idea is that we're all getting along. Look at the americans... it wasn't easy, but they did it, and they're not all the same culture. And none can deny they came stronger out of it, I believe!

People don't realise how good they have it in Europe. You pay too much taxes? You have good roads, health care, trains on time (YES! the trains in Europe are on time!), peace, the ability to settle and buy your own place, start a business, relatively stable currency, etc etc. That's what your taxes pay for. Should I make the comparison with Venezuela? It wouldn't be pretty.

Time to give Bizontito his analgesic... brb, and then back into the breach! ;)

User avatar
pigjes
Cavy Comic

Post   » Thu Jul 23, 2015 8:54 am


Hallo Brambles!

I too stand behind whet you say, I too am a loner in my opinions. I avoid all Dutch forums because of hate speach against just about everybody. It started against foreigners, dropped onto French speakers and now just about anyone people feel jealous at. Ugh. There is so much hatred going on, it's shameful.

I know taxes are necessary, but compared to other European countries, Belgium is getting out of hand, with little return. especially because so much is imposed upon people by law that costs oodles of money. We are not the worst European country, but certainly not one of the best.

SardonicSmile

Post   » Thu Jul 23, 2015 10:02 am


I know we have it relatively good in Europe, but that doesn't mean it is all good.

How should we approach the wide divide in living standards for instance? Like wages. (Yes a lot goes back to money).

Due to mental problems I haven't been able to work and am on welfare. I am so happy that this is something we have here, should we completely cut this out because 'poorer' countries don't have this system?
I would have to move back in with my parents, and that would definitely do none of us any good.

Should we force each country to adopt the same welfare system we have?


In The Netherlands we have been getting our asses handed to us by the government to abide by the 3% rule (I really do not have the vocabulary to explain what this is about in English, or maybe even in Dutch, loads of specific terminology). It means the people have money problems while the government gloats in the EU about how well we did and pay the EU some extra money because on paper we did well and owe back taxes...

And in France... They get extension after extension to abide by this same rule. Big economy in France so the EU is scared to finally put its foot down. And they get more money from the EU because they didn't do as well as expected.


While we get our taxes raised and the countries spending budgets are cut, the EU demands more money to function. It is a money eating machine, and instead of sh!tting out money, it just sh!ts out more sh!t.

User avatar
pig party

Post   » Fri Jul 24, 2015 8:32 am


Oooo, great info guys. I am glad I wasn't too far off the mark.

Having no grounding in economics (closest I came was 'home-economics' which involved cake baking. I got evicted and sent to woodwork instead) it was my attempt at 'first principles' and since the people I was having the discussion with don't do economics either it was an attempt to state a model everyone could grasp. Did I mention this was a discussion in English, Greek and German? So we left out the complicated terminology for want of a three way dictionary.

I know that Germany has a strong export market (made in China esentially means assembled in China, the parts usually come from elsewhere - like Germany) and they make good stuff so fair game. But I don't think we can sell anyone enough olives to keep up. I am not saying Germany should be penalized, I am not saying they should pay more taxes, what I am saying is that there is no incentive for Germany to 'spred the wealth' in Europe so to speak. This wouldn't matter if it was completely independent, as economics would sort it out, but under the present circumstances becomes a bit of a problem.

Like Talishan said - 'Money" doesn't matter, as weird as that sounds, as much as money moving around matters.'

It wasn't so much that I was 'arguing' with my friends that 'Europe' couldn't work so much, more that, as I see it, the foundations weren't gotten right with regards to taxing, public spending etc. Hence the tsunami warning went off and everyone seems to be standing around arguing about what colour swim suit is appropriate.

The opposing arguements seemed more to be about the 'status' of a first world country together with Europe, without considering the financial applications of what that means. So, yes Lynx, I would think that some overall 'tax and spend' policy would have to go hand in hand with a common currency. But then, like Talishan said, that in itself brings about notions of 'the all powerful' which no one really likes the sound of. Probably because national pride is still a really important issue and no-one wants to surrender control of their country to some 'higher power'. That is to say 'the united states of Europe' would undoubtedly be preceded by a 'civil war' - a kind of history rerun, with different yet not disimilar driving forces, on the other side of the Atlantic.

And yes, without getting the basics in place you do end up with issues like the minimum wage, for example. Again, not so much of an issue if you are in a position of independence, or have a common tax and spend policy that can bring balance. But the cost of living here is pretty much equivical to the Gemany according to my German friend who is resident here but goes back and forth regularly (food, petrol, etc are about the same price) yet Germany's and Greece's minimum wage are a little different. That's todays understatement.

As I see it further austerity measures are not going to fix the Euro, in any country, without a proper look at the foundations of what it is built on, and determining whether those foundations can be ammended so they can be built on to achieve Europe's overall aims. Greece will undoubtedly require another bailout whatever they do and this is not going to cheer up anyone in Europe. Not even the Greeks. Its like pigjes said - you just end up creating more and more rules that, in this instance, do nothing to fix the heart of the matter. And yes, it just creates more resentment instead of unification, which was after all the point.

I can also see more 'shadow econimics' emerging - not just working for black money but an exchange of goods for services or indeed other goods, thus bypassing the euro, or the drachma as was/will be, completely. This has always happened here to a greater or lesser extent and touches on the issues raised in the article you posted on the Greek Crisis thread, Lynx. I still swap eggs and oil for stuff. Its not an attempt at tax avoidance, just that my neighbour wants eggs and he has biscuits!! I am wondering how far such shadow economics will be driven here given the new austerity measures.

It is very interesting to have more of an understanding of the US system too for comparative purposes, Talishan. Thank you for an explanation that makes sense to a non-econonic brain. I feel I have a greater depth of knowledge to impart on my argumentative friends, which I feel certain they will appreciate ;-)

And yet you're absolutely right, Brambles, we are in an undoubtedly better situation than many, many places. I only spent 3 months in south America so my experince is very limited, but I didn't hear anyone in La Paz, for example, complaining that their rubbish collection had been reduced to once a fortnight. They were essentially living in the rubbish pile, that was bottom of their list of concerns.

Oh, and if the borders ever came down completely the Greek beurocratic system imposed on everyone would result in unimagined chaos, lol. Its only a matter of time before some wally decides we need an office of debeurocratisation, for that extra level of beurocracy we didn't know we were missing ;)

User avatar
pig party

Post   » Fri Jul 24, 2015 8:38 am


Brambles - when I was in south america a kind of dual currency operated - native currency or dollars, you could pay for a lot of stuff in either. It was a while ago, so I have no clue what the situation is now. Is/was it the same in Venezuela?

User avatar
Lynx
RESIST

Post   » Fri Jul 24, 2015 9:17 am


In the states we are supposed to report exchanges of services as income, I think. So there is some underground economy but not tons (I think).

Brambles

Post   » Fri Jul 24, 2015 10:58 am


Pig Party, Belgium did have a secretary of state for simplifying bureacratic measures in Belgium. I adored the guy, he did marvelous and very noticable work! (Correct me if I'm wrong here Pigjes!)

For a short simplified explanation about the situation in Venezuela: we do have a dual market, but it's a semi-illegal black dollar market. The governement maintains a fixed exchange rate of 1USD = 6.32 Bolivares Fuertes, whereas the black market dollar rate (as per the illegal, blocked but authorative website DolarToday) is 1USD=650 Bolivares Fuertes. Minimum wage is around 6500 Bfs. Last statistis, from official governement department of statistics, of minimum amount of food needed in a family of 4 was 35.000 Bsf. per month. This results, more and more so since the death of Chavez, in a wealthy and extremely luxurious lifestyle for whoever earns or deals in dollars, and poverty for everyone else. Moreover, most national production was abandoned in the past 15 years, and the availability of many products depend on import, and, as a consequence, on the dollar rate. It's a complete mess.

I called myself a dreamer previously because I know eliminating the borders is a silly dream. The national borders make money for both the companies and the countries. They maintain high levels of social law in Western Europe and a population able to buy, and allow exploitation in Eastern Europe for production. You're right Pig Party, there's no incentive for anyone to open up borders... it would actually give the labor force in the south and the east a chance an equal lifestyle as the rest of Europe, and at this moment, that doesn't benefit anyone except the at this moment exploited workers. They supposedly belong to Europe... but as it would seem, not really.

Btw, on a train trip from Bucarest to the coast of Romania in 2008 I saw in the villages on top of schools European flags everywhere. It was the first time I saw Europe and European money in action, and I couldn't disagree with it.
Then, back in Belgium, in Brussels South train station I saw at least once a week groups of 20-30 lost immigrants, their passports taken away by human trafickers, not knowing any language but their own, no clue where to go. Where are they to go? God knows, probably to the closed centers and from there back to their country.
There is no other option but to spread our wealth. One day we're going to regret not doing it.

Post Reply
28 posts