Solving the Euro crisis: A federal Europe or parallel currencies?

European Union leaders are now advocating “More Europe” as a solution to the Euro Crisis. Watch Harvard professor Niall Ferguson explain to The World Economic Forum what a more integrated Europe would entail:

Those pro “More Europe” fail to acknowledge that any federal system implies a transfer of resources from the more efficient and productive core to the periphery.

For well performing countries like Germany a federal Europe would be expensive. According to Ferguson, it would cost the Germans up to 8% of GDP per annum for the foreseeable future. And with the very real possibility of a full-blown European banking crises as a result of a trigger, say a Greek default, is a federal Europe really a good idea?

Seems to me it’s time to start having a fresh look at the problems facing Europe. What’s been done so far isn’t working and it’s highly unlikely that giving more powers to Brussels would do the trick. Contrary to Ferguson’s belief however, there is massive discontent with the EU in Western Europe. Doubt that governments in that part of Europe will be re-elected if they cede more power to Brussels.

The unpredictablility of economics

In 2008 Queen Elizabeth asked top economists at the London School of Economics what caused the economic crisis. And they could not give her an answer. With hindsight we can patch together what happened and the domino effect that ensued. But until events unfolded nobody was certain what would happen. Six month later the British Monarch received a reply from British economist Thomas Palley stating that economists have become increasingly arrogant, narrow minded and unable to innovate.

We can now also conclude that it would probably have been better for the world if Hank Paulson had saved Lehman Brothers, like Warren Buffett suggested. But Paulson, presumably, didn’t understand what Lehman’s bankruptcy would cause and hence refused to do so. Or, as some believe, deliberately exported a US problem to the rest of the world.

The unpredictability of economics is a major problem because most available tools take time to come into effect. By the time they do, the economic landscape may have changed. Even if everybody agrees that solution x is the best way forward they could all turn out to be wrong.

Testing if a crisis can be solved by austerity

At the moment European politicians are for the first time in modern history testing if austerity can fix an economic crisis. It was tried, for instance, in the 1840s and failed. And it looks as if it will fail again. Austerity is unfortunately having a negative impact on growth and development in Europe. People and governments are not spending, which is fatal and goes against the economic health desired.

How about parallel currencies?

Professor Dirk Meyer, an economist based in Germany, has come up with an innovative solution to the financial problems facing Europe.

He rightly states that despite the fact that the Euro is presently causing huge economic problems, it is politically and economically a good idea. Consequently Meyer believes the way forward is to keep the Euro and, at the same time, bring back national currencies.

It’s the best solution to Europe’s problems I have so far come across. And it is my hope that EU leaders are seriously evaluating that option. You may beat them to it by having a look at his ideas in “Bring back Deutsche Marks! (Euros can stay)”. It could enable Europe to have the cake and eat it. Why does it have to be either or? With economies as diverse as say, Germany and Greece, having parallel currencies could very well be the way forward.

Do you believe a federal Europe is a good idea? Will it solve Europe’s current economic problems? Would having parallet currencies work? Is it likely there will be another Lehman trigger in the future? If so, would a federal Europe be more vulnerable or protected? Or maybe you are of the opinion that  the current austerity programs will sort out Europe’s problems? Wen Jiabao said to EU leaders recently: “China will continue to invest in European government bonds and bonds issued by the European Financial Stability Facility”. So if the EU proceed with current policies Europe will, like the United States, end up heavily indebted to the Chinese government. 

Video: WorldEconomicForum – You Tube

Tags: , , , , , , , , , , , , , , , ,

30 Responses to “Solving the Euro crisis: A federal Europe or parallel currencies?”

  1. awriterweavesatale Says:

    it’s all mind boggling what is happening in Europe. Very frightening.
    My recent post Sandra’s Writing Workshop

  2. catarinaalexon Says:

    Yes Sandra, let's hope Europe gets their act together swiftly.

  3. Leora Says:

    I am hardly an economic expert and certainly not about Europe, but I welcome your posts as a way to educate myself on some of the issues. As an outsider, it does seem that Germany operates very differently than a country like Greece, so I can imagine there are bound to be multiple continuing problems.
    My recent post Ask Questions to Solve Technical Problems

  4. catarinaalexon Says:

    Thank you. Leora, that's why the Euro is a problem. You cannot have one central bank for economies as diverse as Germany and Greece. That's why having parallel currencies could be a good way forward. I

  5. findingourwaynow Says:

    These are tough questions for me. I see value in parallel currencies and challenges as well, what and how to manage it for one. As far as austerity is concerned; history does show that, in theory, it looks like it would do some good, in practice it has been a disaster. Hindsight is all so very interesting. It can help give us good indicators as to what and what not to do in the future.

    This is a very tough problem. Only time will tell what the result of any chosen actions will be. No one really knows what to do but inaction is certainly not a good course to take. I just hope that what every is done, that is has a positive affect.
    My recent post Lemon Sangria: Wine

  6. catarinaalexon Says:

    Glad you agree with me Susan.It's frightening that nobody knows what would sort out the crisis. But resorting to austerity that has never worked will not do the trick.

  7. GuyW Says:

    As I wrote in December last year, I really cannot see a Federal Europe working – there is simply too much national pride among the various countries, and that's apart from the costs you mention…

    I still firmly believe the only way forward is for the Euro to once again become a trade currency, similar to the old EMU, and for the countries to revert to their own sovereign currencies. This would facilitate the continuation of free-trade within Europe while allowing countries to link their currencies appropriately to their performance. Very much along the parallel currency idea you propose.

    The constant inaction by European governments in an attempt to boost what sensibly cannot survive will continue to make things worse. Better to make a clean break and move in: the Europe experiment failed.

  8. catarinaalexon Says:

    In other words Guy, you agree that parallel currencies is the best idea so far.

  9. Geek Girl Says:

    This is a tough situation all the way around. The experts in these fields seem to have done nothing but make a bigger mess. I am not even close to being an expert, but I can clearly see that the options currently on the table are not working. Fresh sets of eyes and thinking outside the box may be what is needed here.

  10. catarinaalexon Says:

    True Cheryl. However, what happens in Europe has a huge impact on the world economy i.e. on every human being on earth.

    Greece's problems, for instance, started when Goldman sold them a currency swap and other products for "creative accounting". Having parallel currencies would enable them to get the drachma back while keeping the Euro as a trading currency. That would enable Greece to sort out their problems which is impossible as long as they have to deal with the central bank for all the countries in the Euro.

  11. Susan Oakes Says:

    Hi Catarina,

    It seems like they are just throwing out ideas hoping one will work. I don't think you can have one central bank for the reasons you mentioned. The austerity measures reminds me of companies that go on a cost cutting spree to help the bottom line. In the end it doesn't work as stops innovation and progressive ideas.
    My recent post One Small Feature One Huge Marketing Difference

  12. Becc Says:

    The comment "mind boggling" is perfect. I too hope Europe gets their act together. The effects are far reaching.
    My recent post Finding Babysitters When You’re on the Road

  13. catarinaalexon Says:

    Thank you for conveying your opinion, Dan. The sooner Keynesian economic principles are implemented the better. As it is the world economy works like a casino and the results are accordingly. But unfortunately it doesn't seem like anybody has learnt from the current crisis since they continue as if nothing had happened. So unfortunately it's just a question of what trigger will result in another world-wide crash. Keynes is not fashionable instead they continue with their calculations that may or may not be right.

  14. catarinaalexon Says:

    Glad you agree with me Becc.

  15. catarinaalexon Says:

    That's exactly it Susan. The world economy works as a casino. We may win or lose. Until they start implementing Keynes ideas it will not improve. But that's unlikely to happen for some time, unfortunately.

  16. Jeannette Paladino Says:

    Europe and the U.S. have fallen into the same trap — fighting deficits by curbing spending. Nobel-prize winning economist Paul Krugman has consistently championed more government spending, not less, to stimulate the economy by providing more jobs and spending our way out of this deep recession. Austerity in Europe hasn't worked. Maybe it's time for governments to start spending again, counter-intuitive as that may seem.
    My recent post Are You Targeting the Right Blogs for Your Guest Posts?

  17. catarinaalexon Says:

    In other words Lanre, Keynes principles have to be implemented. The neo-liberal austerity will just prolong the recession and make it even longer. Not to mention how people will suffer all over the world if Europe doesn't get their act together.

  18. catarinaalexon Says:

    Exactly Jeannette. What Paul Krugman is saying needs to be done is implementing Keynes principles. The US has been better at doing so than Europe. Let's face it if the US hadn't swiftly implemented his principles when Lehman Brothers collapsed the whole world economy would have collapsed completely. That's the only reason we didn't have a full blown depression now like The Great Depression.

  19. Tope Olofin Says:

    Well, I am a total novice when it comes to economics, but I personally don’t think it is possible to eat your cake and have it. Is there anything wrong in bringing back the old currencies and slowly fading out the Euro? This is just me thinking out loud!!!

  20. catarinaalexon Says:

    Thanks for conveying your opinon Tope. European leaders will not get rid of the Euro voluntarily and it only needs to be used for trade purposes. Greece can have the drachma back, Spain the peseta and so forth. That wil enable them to have their own central bank and hence manage their own economy. Devalue their currency or whatever needs to be done to get them out of an economic crisis. As it is now with the Euro their hands are bound.

  21. Doreen Pendgracs Says:

    I'm afraid the subject of world economics is over my head.

    As an avid traveller, I have noticed positive and negative effects since the Euro was introduced. Certainly, it has boosted prices up in countries such as Greece, Italy, Spain and others, where prices used to be cheap for food and services and are now much higher. And I suspect that's been part of the root of the problem with the countries that are now suffering from economic failure. Maybe they should have left well enough alone.
    My recent post why the creative community needs Toastmasters

  22. catarinaalexon Says:

    We are so lucky Doreen that we are Canadian and Swedish. Our countries were not hit the way the US and the rest of Europe has been. If you had been American and I had been, say, Greek our lives may have been completely different today.

  23. Radu Says:

    Even though i'm not an economy expert i think i can answer to this question " In 2008 Queen Elizabeth asked top economists at the London School of Economics what caused the economic crisis. "

    Artificial inflation of prices of real estates, actually on everything.

  24. catarinaalexon Says:

    Thank you for letting us know your opinion Radu. It's easy to find scape goats such as real estate prices, the banks, regulatory authorites, rating agencies and so forth. But what it all boils down to are today's economists. They are at the root of the problem.

  25. Slim Says:

    Great Discussion, Catarina.

    Any resolution regarding the Euro must come after the resolution of the crisis. The failure to solve the crisis arises from the absence of capital investment and economic development.

    Coll:
    A country borrows money
    Invests in economic development
    Revenue increases
    The country repays the loan with the increased revenues.

    The bailout programme failed because:

    Governments borrowed the money under strict constraints.
    They payed bills.
    They "fired people, cut wages, raised taxes."
    The economy contracted.
    The loans came due.
    They borrowed money (under strict constraints) to repay the loans.

    Economies don't work well under plan b. That is why I wrote, "The Lender of First Resort."

    Regards,

    Slim
    My recent post Theocracy? America!

  26. catarinaalexon Says:

    My pleasure Slim. What's needed is to emplement Keynes principles. Austerity will not do the trick. As it is European economies are stagnating. Catch is today's economies don't master Keynes.

  27. catarinaalexon Says:

    Slim, we all know that if today's economists were like Krugman the world economy would be in a better shape.

  28. pterpalms Says:

    Of course they knew and still know the cause of the economic collapse. All of the Central Banks except North Korea, Cuba and Iran as well as most of the BIS are owned by the Rothschild Family. There is no separate European problem it is a global problem . All Fiat systems are based upon legalizing counterfeiting and all of them have collapsed in the history of banking including the first three central banks of the U.S. The current Federal Reserve System created in 1913 is facing imminent collapse as described in "The Creature from Jekyll Island", fifth edition, published September 2010 at which point the National debt of the U.S. had reached $202 trillion, when all liabilities are included.

    Everyone is aware of this and the decision to ignore these facts is politically motivated as described in chapter 24, 25, 26 The last 90 pages of this 600 page book. This economic collapse is no accident. It's intention is a New World Government and world currency

    The Federal reserve is neither an arm of the government nor is it private. It is a hybrid. It is an association of the large commercial banks which has been granted special privileges by Congress A more accurate description would be simply that it is a Cartel protected by federal law. " Because all fiat currency in history has always collapsed. . The money supply will continue to expand, inflation will continue to roar, and the nation would continue to die. Issuing money without gold or silver backing violates the constitution. They are not subject to the law. It should be abolished. They are not independent of the government. they have taken over the government.
    • It is incapable of accomplishing its stated objectives.
    • It is a cartel operating against the public interest.
    • It is the supreme instrument of usury.
    • It generates our most unfair tax.
    • It encourages war.
    • It destabilizes the economy.
    • It is an instrument of totalitarianism.

    DETAILS UPON REQUEST. OR READ THE BOOK.

    THE NATURAL LAWS OF HUMAN ECONOMIC BEHAVIOR

    1. Long term price stability is possible only when the money supply is based upon the gold (or silver) supply without government interference.

    2. For a nation to enjoy economic prosperity and political tranquility, the monetary power of its politicians must be limited solely to maintenance of honest weight and measures of precious metals.

    3. A nation that resorts to use of fiat money has doomed itself to economic hardship and political disunity.

    4. Fraction money will always degenerate into fiat money. It is but fiat money in transition

    5. When men are entrusted with the power to control the money supply, they will eventually use that power to confiscate the wealth of their neighbors.

    To expound otherwise has only two possible explanations, neither one of which would serve the interests of the public.

  29. peterpalms Says:

    All of the Central Banks except North Korea, Cuba and Iran as well as most of the BIS are owned by the Rothschild Family. There is no separate European problem it is a global problem . All Fiat systems are based upon legalizing counterfeiting and all of them have collapsed in the history of banking including the first three central banks of the U.S. The current Federal Reserve System created in 1913 is facing imminent collapse as described in "The Creature from Jekyll Island", fifth edition, published September 2010 at which point the National debt of the U.S. had reached $202 trillion, when all liabilities are included.

    Everyone is aware of this and the decision to ignore these facts is politically motivated as described in chapter 24, 25, 26 The last 90 pages of this 600 page book. This economic collapse is no accident. It's intention is a New World Government and world currency

    The Federal reserve is neither an arm of the government nor is it private. It is a hybrid. It is an association of the large commercial banks which has been granted special privileges by Congress A more accurate description would be simply that it is a Cartel protected by federal law. " Because all fiat currency in history has always collapsed. . The money supply will continue to expand, inflation will continue to roar, and the nation would continue to die. Issuing money without gold or silver backing violates the constitution. They are not subject to the law. It should be abolished. They are not independent of the government. they have taken over the government.
    • It is incapable of accomplishing its stated objectives.
    • It is a cartel operating against the public interest.
    • It is the supreme instrument of usury.
    • It generates our most unfair tax.
    • It encourages war.
    • It destabilizes the economy.
    • It is an instrument of totalitarianism.

    DETAILS UPON REQUEST. OR READ THE BOOK.

    THE NATURAL LAWS OF HUMAN ECONOMIC BEHAVIOR

    1. Long term price stability is possible only when the money supply is based upon the gold (or silver) supply without government interference.

    2. For a nation to enjoy economic prosperity and political tranquility, the monetary power of its politicians must be limited solely to maintenance of honest weight and measures of precious metals.

    3. A nation that resorts to use of fiat money has doomed itself to economic hardship and political disunity.

    4. Fraction money will always degenerate into fiat money. It is but fiat money in transition

    5. When men are entrusted with the power to control the money supply, they will eventually use that power to confiscate the wealth of their neighbors.

    To expound otherwise has only two possible explanations, neither one of which would serve the interests of the public.

  30. catarinaalexon Says:

    Thank you for conveying your opinion, Peter.

Leave a Reply