Wednesday, November 17, 2010

Great Analysis of the Euro (FXE) by Matthew Lynn

This article from Bloomberg columnist Matthew Lynn is the best analysis on the Euro crisis that I have seen so far:

When the euro was launched, it was a big bet that sharing the same currency would make a group of very different economies converge, and so allow the European Central Bank to operate a single monetary policy for all of them.

It was an interesting theory, but it turned out to be wrong. The economies are just too different to allow a single central bank to manage all of them. Interest rates are always wrong everywhere. How that expresses itself varies. In Greece, it was a fiscal crisis. In Ireland, a banking collapse. In Spain, a construction bubble that burst. In Germany, a massive trade surplus. But, like a river looking for the sea, it always comes out somewhere.

This crisis will keep moving from country to country. The only permanent fix is splitting up the euro into more manageable currency areas. Until the euro area’s leaders recognize that simple truth, every bailout they come up with is only going to shift the attacks elsewhere.
Matthew Lynn is also the author of Bust: Greece, the Euro and the Sovereign Debt Crisis, a forthcoming book on the Greek debt crisis. I have pre-ordered a copy.

Naturally, any sort of centrally planned economy is inevitably going to fail, but his explanation of why the EMU is failing is very eloquent.

There has been almost two year quiet period, a respite from the global depression. That was a chance, in theory, to fix problems instead of kicking them down the road. That no one even attempted to fix the problems during that period suggests to me that the problems are intractable.

I am really hard on complacency - both in the market and in public life - in this blog. I believe that complacency has caused human civilization to become extremely brittle.

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