Geral
Q: Thank you very much. Before we sign off, could I just take the opportunity to ask you what you think the prospects are for the attempts in Europe to create a common currency area? Are you optimistic about their success?
A: I think it's a big gamble and I'm not optimistic. Unfortunately, the Common Market does not have the features that are required for a common currency area. A common currency area is a very good thing under some circumstances, but not necessarily under others. The United States is a common currency area. Australia is also a common currency area. The characteristics that make Australia and the United States favourable for a common currency are that the populations all speak the same language or some approximation to it; there's free movement of people from one part of the country to the other part, so there's considerable mobility; and there's a good deal of flexibility in prices and to some extent in wages. Finally, there's a central government which is large relative to the local state governments so that if some special circumstances affect one part of the country adversely, there will be flows of funds from the centre which will tend to offset that.
If you look at the situation in the Common Market, it has none of those features. You have countries with people all of whom speak different languages. There's very little mobility of people from one part of the Common Market to another. The local governments are very large compared to the central government in Brussels. Prices and wages are subject to all sorts of restrictions and control.
The exchange rates between different currencies provided a mechanism for adjusting to shocks and economic events which affected different countries differently. In establishing the common currency area, the Euro, the separate countries are essentially throwing away this adjustment mechanism. What will substitute for it?
Perhaps they will be lucky. It may be that events, as they turn out in the next 10 or 20 years, will be common to all the countries; there will be no shocks, no economic developments that affect the different parts of the Euro area asymmetrically. In that case, they'll get along fine and perhaps the separate countries will gradually loosen up their arrangements, get rid of some of their restrictions and open up so that they're more adaptable, more flexible.
On the other hand, the more likely possibility is that there will be asymmetric shocks hitting the different countries. That will mean that the only adjustment mechanism they have to meet that with is fiscal and unemployment: pressure on wages, pressure on prices. They have no way out. With a currency board, there is always the ultimate alternative that you can break the currency board. Hong Kong can dismantle its currency board tomorrow if it wants to. It doesn't want to and I don't think it will. But it could. But with the Euro, there is no escape mechanism.
Suppose things go badly and Italy is in trouble, how does Italy get out of the Euro system? It no longer has a lira after whatever it is - 2000 or 2001 - so it's a very big gamble. I wish the Euro area well; it will be in the self-interest of Australia and the United States that the Euro area be successful. But I'm very much concerned that there's a lot of uncertainty in prospect.
* * *
Milton Friedman, em 17/Jul/1998
- How The Euro Will End
By GERALD P. O'DRISCOLL JR, WSJ The euro is the world's first currency invented out of whole cloth. It is a currency without a country. The European Union is not a federal state, like the United States, but an agglomeration of sovereign states....
- Saving The Euro Is The Wrong Goal
By Gideon Rachman, Financial Times As the European ship heads for the rocks, so the officers in charge are being thrown overboard. This week could see the departure of the prime ministers of both Greece and Italy. But while politicians may come and go,...
- Milton Friedman's Euro Smackdown
By GENE EPSTEIN, Barron's Speaking in 1998, just before the launch of the euro in January of the following year, monetary economist Milton Friedman said he was "not optimistic" about the new currency's prospects. "Suppose things go badly, and...
- 'euro Bonds Would Destroy The Euro'
Interessante debate no Spiegel Online sobre a crise do euro. Nem preciso dizer qual partido eu tomo. Seguem alguns trechos de Hans-Werner Sinn: "Euro bonds would destroy the euro zone. If all countries -- regardless of their creditworthiness -- were to...
- Buttonwood: Forty Years On
The Economist FORGET Watergate. For economic historians, Richard Nixon’s place in history is secure. He was the president who, 40 years ago, severed the link between global currencies and gold and ended the fixed-exchange-rate system. Under the Bretton...
Geral
O sábio profeta
Q: Thank you very much. Before we sign off, could I just take the opportunity to ask you what you think the prospects are for the attempts in Europe to create a common currency area? Are you optimistic about their success?
A: I think it's a big gamble and I'm not optimistic. Unfortunately, the Common Market does not have the features that are required for a common currency area. A common currency area is a very good thing under some circumstances, but not necessarily under others. The United States is a common currency area. Australia is also a common currency area. The characteristics that make Australia and the United States favourable for a common currency are that the populations all speak the same language or some approximation to it; there's free movement of people from one part of the country to the other part, so there's considerable mobility; and there's a good deal of flexibility in prices and to some extent in wages. Finally, there's a central government which is large relative to the local state governments so that if some special circumstances affect one part of the country adversely, there will be flows of funds from the centre which will tend to offset that.
If you look at the situation in the Common Market, it has none of those features. You have countries with people all of whom speak different languages. There's very little mobility of people from one part of the Common Market to another. The local governments are very large compared to the central government in Brussels. Prices and wages are subject to all sorts of restrictions and control.
The exchange rates between different currencies provided a mechanism for adjusting to shocks and economic events which affected different countries differently. In establishing the common currency area, the Euro, the separate countries are essentially throwing away this adjustment mechanism. What will substitute for it?
Perhaps they will be lucky. It may be that events, as they turn out in the next 10 or 20 years, will be common to all the countries; there will be no shocks, no economic developments that affect the different parts of the Euro area asymmetrically. In that case, they'll get along fine and perhaps the separate countries will gradually loosen up their arrangements, get rid of some of their restrictions and open up so that they're more adaptable, more flexible.
On the other hand, the more likely possibility is that there will be asymmetric shocks hitting the different countries. That will mean that the only adjustment mechanism they have to meet that with is fiscal and unemployment: pressure on wages, pressure on prices. They have no way out. With a currency board, there is always the ultimate alternative that you can break the currency board. Hong Kong can dismantle its currency board tomorrow if it wants to. It doesn't want to and I don't think it will. But it could. But with the Euro, there is no escape mechanism.
Suppose things go badly and Italy is in trouble, how does Italy get out of the Euro system? It no longer has a lira after whatever it is - 2000 or 2001 - so it's a very big gamble. I wish the Euro area well; it will be in the self-interest of Australia and the United States that the Euro area be successful. But I'm very much concerned that there's a lot of uncertainty in prospect.
* * *
Milton Friedman, em 17/Jul/1998
- How The Euro Will End
By GERALD P. O'DRISCOLL JR, WSJ The euro is the world's first currency invented out of whole cloth. It is a currency without a country. The European Union is not a federal state, like the United States, but an agglomeration of sovereign states....
- Saving The Euro Is The Wrong Goal
By Gideon Rachman, Financial Times As the European ship heads for the rocks, so the officers in charge are being thrown overboard. This week could see the departure of the prime ministers of both Greece and Italy. But while politicians may come and go,...
- Milton Friedman's Euro Smackdown
By GENE EPSTEIN, Barron's Speaking in 1998, just before the launch of the euro in January of the following year, monetary economist Milton Friedman said he was "not optimistic" about the new currency's prospects. "Suppose things go badly, and...
- 'euro Bonds Would Destroy The Euro'
Interessante debate no Spiegel Online sobre a crise do euro. Nem preciso dizer qual partido eu tomo. Seguem alguns trechos de Hans-Werner Sinn: "Euro bonds would destroy the euro zone. If all countries -- regardless of their creditworthiness -- were to...
- Buttonwood: Forty Years On
The Economist FORGET Watergate. For economic historians, Richard Nixon’s place in history is secure. He was the president who, 40 years ago, severed the link between global currencies and gold and ended the fixed-exchange-rate system. Under the Bretton...