The Inevitable Failure Of The Euro...Tim Worstall

The Inevitable Failure of the Euro

http://blogs.forbes.com/timworstall/2011/06/22/the-inevitable-failure-of-the-euro/

Tim Worstall

IT'S ALL TRIVIAL OR OBVIOUS EXCEPT

Jun. 22 2011 - 11:16 am 

I’m afraid that the failure of the euro in its current form is inevitable. I’ve been saying this since 1995 and if anyone can be bothered you can probably find me on Usenet saying so.

The problem isn’t banks, lack of political will, the recession, it’s quite simply that the current eurozone just isn’t an optimal currency area. And for a common currency to work it must be applied across something which is at least close to being an optimal currency area.

To see what I mean look at this chart from a San Francisco Federal Reserve publication:

The Taylor Rule (don’t worry about the details, this isn’t an economics seminar) is a method of working out what interest rates should be. Of course, if you’ve got one currency for an area you’ve got to have one interest rate for that area: individual borrowers can be charged differently, but not whole geographic areas.

So, to be an optimal currency area it is necessary that interest rates, as determined by the Taylor Rule, are desirably the same in all areas of that currency zone. If we’ve got areas that need very different interest rates then it’s not a good area to be trying to cover with that single currency.

And as you can see the desired, target, interest rates are very different for the peripheral countries (Portugal, Ireland, Greece, Spain, the so called PIGS) than they are for the core countries (Belgium Holland, Germany, France etc). And it’s not just now that they’re different: they’ve been different all along except for that brief moment in late 2008 when the financial crisis hit.

http://blogs.forbes.com/timworstall/2011/06/22/the-inevitable-failure-of-the-euro/

All information on this website is for educational purposes only and is not intended to provide financial advise. Any statements about profits or income, expressed or implied, does not represent a guarantee. Your actual trading may result in losses as no trading system is guaranteed. You accept full responsibilities for your actions, trades, profit or loss, and agree to hold MinKL Invest harmless in any and all ways.