"When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals.
We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues"

( JM Keynes, "Economic Possibilities for our Granchildren" 1930 )

Wednesday, May 19, 2010

60.2 Millions Silent Votes in favor of the Euro

During the last weeks we have been witnessing the spectacular collapse of the common currency: Just a month ago the Euro value was ap. 1.35 USD while today ( 19.5.2010) we are at 1.22, a devaluation of app. 10% within a very short period. Such violent movements between currencies are very unusual across the majors ( i.e. the most liquids currencies of the big economic superpowers) and have the potential to trigger financial and economic turbulences.

One of the typical outcome from huge financial movements is the sudden proliferation of real, imaginary and /or self proclaimed "experts". These people do not limit themselves to a post mortum analysis of known facts, but tend to extrapolate the current state of affairs into future doomsday scenarios. In the case of the recent Euro collapse the perceived ZeitGeist can be described as the expectation of experiencing in the near future more volatile markets and a possible collapse of the Euro as a single currency of the EU. The story does not end heresd : such developments could carry the potential to drag the whole project named “European Union” into the abyss. WOW !

These experts claim (correctly) that the EU lacks the economic and political mechanisms needed to maintain the cohesion of the Union sufering from severe economic disruptions. According to that logic, the ACTUAL self interests of the EU countries are against the EU and tge Euro , so the common currency is deemed to demise , sooner or later. The last violent shifts of the currency valuations reflect the markets´ perceptions of these difficulties , a mere reflection of the real weakness. In economic jargon, at present the cost of the Euro exceed its benefits so its future is more than questionable. Clear Cut.

As a matter of fact that line of thinking is not new at all, it´s just a modern adaptation of a 50 years old theory (“Optimal Currency Area” OCA) developed by the Noble Laureate R. Mundell. So, if both theory and common sense advocates against the formation of a common currency in European style circumstances, the natural question should be as follows : Why Europeans countries engaged in such “impossible mission?. Were European leaders so fool (or G-D forbid, corrupt), to lead their people into an economic inferno?

That question as it´s presented describes the line between abstract theories and an historical perspective of the economy. THe common economic analysis tends to be based upon abstract models which are supposed to resemble the real life. However, from a "pure" theoretic perspective, economists tend to forget that even the most accurate theoretic models respond to a specified set of assumptions. That principle applies to the OCA theory as well.

Now, it is permitted even under the most abstract models to change the assumptions as long as they are relevant and reasonable. Now, if we will modify the analysis but only incorporate a slight and sensible modification: Lets assume that an OCA tends to reduce the number and magnitude of armed conflicts ( since a common economic policy generates common interests ,,, etc.) . Wouldn´t the sensible change of the assumptions have some impact on the outcome of our respected OCA model?

Going back to the 50 , this is probably the question European leaders asked themselves when they established the first foundations for an economic (and political) union. However, this is where the historical perspective of the analysis enters and practically changes the outcome.

Let us not forget that by mid 50 the silence of more than 50 million people killed a decade ago was louder than the cries from “frenzy markets”. Although economic models were as abstract as ever, the huge economic cost of two world wars was still fresh in minds and was determinant at the moment to decide whether to maintain the old and risky European model or advance toward an economic and political mechanism that would be able to prevent a future WWIII. I guess European leaders were very conscious about the hardships of such an entrepreneurship, but they understood that the alternative for Europe and the world are much worst. One of the consequence of their decisions is the Common currency and one of the longest peace periods in Europe (more than 60 years w/o serious wars!!).

My last point is that I hope that the proper historical perspective is present in front of the European leaders when they are asked to evaluate the pros and cons of maintaining the cohesion of the Union. There is only one thing that they can count on it for sure: 60.2 millions of silent votes would probably vote in favor of the EU and the Euro despite the conjectural difficulties.

No comments: