Sunday, April 17, 2011

euro zone

Very good article.

"[T]he euro, in retrospect, appears to have been a misguided attempt to equalize the values for some very unequal assets, namely the bank deposits of strong countries and those of weak countries."

In retrospect, it seems pretty obvious that unity in monetary policy also requires a degree of unity in fiscal policy. But then, since the United States is a collection of partially fiscally separated states as well, this makes me wonder how important psychology is in the equation.

The possibility of separate monetary policies among the states is completely off of anyone's radar in the U.S. But that was the norm until 1999 in Europe, so regardless of the political and legal feasibility of eurozone separation, it's most certainly not off the radar. A situation that makes the benefits of separation clear is an alarm bell in Europe. A bankrupt state of California would also love to inflate it's way to lower debt I'm sure, but no one is worrying about that possibility and moving their bank accounts to North Dakota.

Sure, the legal ties between the states are much stronger than between the countries of Europe, but legality is ultimately just a commitment to a common psychology. And legality, as made very clear by the European situation right now, can't trump reality, including contradictory psychology, forever. And it's also true that the federal budget dwarfs any differences in fiscal policy between the states, but this only reduces the magnitude of the issue, it doesn't negate it.

Maybe the eurozone is fragile because people expect it to be fragile. And the U.S. is strongly unified only because we expect it to be unified.

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