Friday, February 20, 2015

Why the Euro will ultimately fail
This disaster was entirely avoidable if the Euro bureaucrats had bothered to read Robert Mundall and Marcus Flemming’s seminal paper from 1962 which stated that according to well established macro economic models it was impossible to have domestic fiscal autonomy, fixed exchange rates, and free capital flows: no more than two of those objectives could be met. They won the nobel prize in economics for this in 1992, so it’s not exactly an obscure crackpot theory.

Since the euro is, by definition, the currency used in the eurozone the exchange rates must be fixed. One euro in Greece is the same as one euro in Germany. The same goes for free capital flows, if you have one euro in Spain and can’t spend it in Germany the eurozone doesn’t make much sense. So if it has to work the Euro zone members must give up their fiscal autonomy. What does this mean?

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