"The Non-Sovereign Nature of the Euro and the Problems Raised by the Global Financial Crisis
By L. Randall Wray
In the next series of blog posts, we will look in more detail at fiscal and monetary operations of a nation with a sovereign currency. Before we do that, let us briefly examine the case of the Euro. Let me say that we will not address the unfolding crisis across Euroland in detail. The reason is that events are moving too quickly and we do not know where they will lead. This primer in some sense needs to be “timeless”—anything specific that we discuss will quickly become outdated. The fundamental point to be made here is that the Euro arrangement was flawed from the beginning. Crisis was inevitable—as I have been writing since the mid 1990s. There is no way the system as designed could possibly survive a significant financial crisis. And a crisis began in 2007. Due to flaws in the set-up, it was obvious (at least to those who adopted MMT) that the original arrangement was not sustainable. We could not say for sure how the resolution would turn-out, but a fundamental change would be required.
At one end of the spectrum of outcomes, the European Monetary Union would simply be dissolved and each nation would return to a sovereign currency. At the other end, a “more perfect union” would be created. We always argued that separating fiscal and monetary policy was the basic problem. Almost no one would listen to us. A notable exception was the economist Charles Goodhart. Now, in fall 2011, it has become common to blame the separation of monetary and fiscal policy for the crisis of the EMU. It is finally recognized that an arrangement in which monetary policy is unified under the international ECB, but fiscal policy is left to individual nations, was the primary flaw. Most economists still do not recognize, however, that it comes down to currency sovereignty. It is not just that you need unification of fiscal policy; you need a sovereign currency issuer that will take responsibility for fiscal policy. Extremely slow recognition of that problem has now dragged out the crisis for four years; and as of Fall 2011 it still is not clear that resolution is politically possible..."
at http://www.creditwritedowns.com/2011/09/unusual-case-of-euroland.html
By L. Randall Wray
In the next series of blog posts, we will look in more detail at fiscal and monetary operations of a nation with a sovereign currency. Before we do that, let us briefly examine the case of the Euro. Let me say that we will not address the unfolding crisis across Euroland in detail. The reason is that events are moving too quickly and we do not know where they will lead. This primer in some sense needs to be “timeless”—anything specific that we discuss will quickly become outdated. The fundamental point to be made here is that the Euro arrangement was flawed from the beginning. Crisis was inevitable—as I have been writing since the mid 1990s. There is no way the system as designed could possibly survive a significant financial crisis. And a crisis began in 2007. Due to flaws in the set-up, it was obvious (at least to those who adopted MMT) that the original arrangement was not sustainable. We could not say for sure how the resolution would turn-out, but a fundamental change would be required.
At one end of the spectrum of outcomes, the European Monetary Union would simply be dissolved and each nation would return to a sovereign currency. At the other end, a “more perfect union” would be created. We always argued that separating fiscal and monetary policy was the basic problem. Almost no one would listen to us. A notable exception was the economist Charles Goodhart. Now, in fall 2011, it has become common to blame the separation of monetary and fiscal policy for the crisis of the EMU. It is finally recognized that an arrangement in which monetary policy is unified under the international ECB, but fiscal policy is left to individual nations, was the primary flaw. Most economists still do not recognize, however, that it comes down to currency sovereignty. It is not just that you need unification of fiscal policy; you need a sovereign currency issuer that will take responsibility for fiscal policy. Extremely slow recognition of that problem has now dragged out the crisis for four years; and as of Fall 2011 it still is not clear that resolution is politically possible..."
at http://www.creditwritedowns.com/2011/09/unusual-case-of-euroland.html
