Spain inside or outside the EuroZone
Michael Pettis - Economist - Article in La Vanguardia -
Over the next few years, as the economy continues to deteriorate, the debate about whether or not Spain should leave the Euro is likely to become fierce. The defenders of the single currency, especially the political and financial elites, argue that only the euro can prevent Spain from becoming a Third World country. If you make a responsible adjustment through wage deflation and fiscal austerity, they say, the country will emerge from the crisis stronger than ever.
But will he manage to leave? By renouncing the peseta, Spain also relinquished control of the national monetary policy, largely as countries governed by the gold standard system at the end of the 19th century. And, like them, the low competitiveness of their exports means that they now have to go through the same difficult adjustments to reduce prices.
The cost will be great. According to the American economist Barry Eichengree, with the gold standard the weight of the adjustment was borne principally by the workers through unemployment and low wages. The political emancipation of workers in the 20th century, adds Eichengreen, prevents Western democracies from returning to gold, because in a modern democracy workers rightly refuse to pay that cost.
If Eichengreen is right, it is likely that Spanish workers will also refuse to pay the cost of keeping the Euro. Now, leaving the eurozone, will condemn Spain to the long-term economic decline? Almost certainly, no. A similar debate took place in France many decades ago, which may shed some light on current problems.
After the First World War, which blew up the monetary agreements of previous years, Paris faced the question of what to do with the franc. At the same time as most countries, France went through a serious inflation during the war that made it difficult to return to parity with prewar gold, largely as it has been during the last decade with Spain, where inflation in relation to Northern Europe has made the country not competitive at all.
At the beginning of the twentieth century, it was widely accepted that a serious country had to maintain itself in the gold standard system. It was considered that not doing so was irresponsible and condemned the country to economic stagnation. For much of the first half of the 1920s, France struggled with all its might to return to the gold standard according to the prébélico exchange rate.
However, he could not do it. Inflation eroded the value of the franc so much that the French industry stopped being competitive; and, in the first half of the decade, the country suffered from high unemployment and low growth. In 1928, I yield to the inevitable and in the middle of the political case, President Poincaré devalued the franc.
France's capitulation to monetary irresponsibility mortified its bankers and earned him the scornful insults of Britain and the rest of Europe. Reliable predictions were made both in France and abroad that the national economy would plunge into inflation and stagnation.
It was not so. In reality, the French economy recovered. In fact, the devaluation of the franc was not an act of irresponsibility, but a simple late recognition of a monetary reality.
Moreover, while France's competitors struggled to maintain their overvalued currencies, French economic results soon overtook those of rival countries. When much of the world was dragged into the 1930-31 crisis, the country remained largely immune to the deep depressions suffered by the United States, Great Britain and most of the industrialized world.
Other countries ended up being forced to devalue their currency and Paris maliciously condemned the irresponsibility of those same countries that had criticized France a few years before. With the gold accumulating in the Bank of France gravia to an already strong export sector, France once again saw itself with pride as a global guarantor of monetary rigor.
It was a mistake, an error that the historian Tom Kemp called "almost pathological addiction" to monetary orthodoxy. As one country after another devalued its currency in the early 1930s (the United States eventually did so in 1934), France's competitive position weakened rapidly, although the country remained firm in its position of not resorting to new to a devaluation.
The French economy then began to resent strongly. While the rest of the world adjusted its currencies, France suffered again deflation, low wages and unemployment; This infuriated the workers, weakened the ecomony and brought the country to the brink of economic and political collapse.
When the world recovery began in 1934, the situation in France only worsened.
In 1936, Paris was unable to maintain the value of the franc and was ignominiously forced to abandon the gold standard again.
The cost of the wait was enormous. In the end, France was one of the countries most affected by the Great Depression.
And all the suffering was vain. The country was forced to a new devaluation; and, when he did, he had to drag the additional burden of closed factories, furious workers, and poor infrastructure.
What lesson can be drawn for Spain? At least two. The first is that the ability to direct national monetary policy constitutes a very important political instrument, even though often irresponsible leaders have abused it.
By pathologically clinging to the euro, Spain is placed in a position of enormous disadvantage against Germany and other countries with surplus capital from Europe and the rest of the world.
As was the case with France's attachment to gold in the 1920s and 1930s (which seemed responsible at the time, but which in retrospect turned out to be wildly foolish), Madrid's desperate struggle to keep the euro for as long as possible will not seem one day a heroicity but a madness. The euro does not serve the Spanish economy as it is organized today, and refusing to recognize it is not a sign of maturity or responsibility.
he second lesson is that the attachment of bankers and economic policymakers for responsible monetary behavior is not always justified. The economic cost of maintaining an overvalued currency during a period of weak global demand can be so high that it weakens the very credibility that is sought with this monetary rigidity. Spanish and foreign investors will not applaud a Spain that clings heroically to the euro if the economy shatters and unemployment remains high for years.
Not only the case of France illustrates that danger. During the 1920s and 1930s, countries that had previously abandoned the gold regime also left before the Great Depression. The longer a country defended its currency (as happened with the United States, France and the Gold Bloc countries), the worse the consequences.
In a long-term global contradiction, inflexibility harms growth and even credibility. Spain should learn from history. There is no doubt that participating in the euro has advantages, but the history of monetary unions indicates that the benefits only exist during periods of rapid global growth and increasing liquidity. When the cycle of globalization ends, monetary unions always collapse.
Europe is not an optimal currency zone; and, in a world with weak global demand, the cost to Spain of submitting to the monetary and fiscal needs of Germany will be very high. And all for what? After years of effort, Spain will be forced to abandon the euro anyway.
The later in doing so, as the case of France teaches us so clearly, the greater will be the sufferings.
Over the next few years, as the economy continues to deteriorate, the debate about whether or not Spain should leave the Euro is likely to become fierce. The defenders of the single currency, especially the political and financial elites, argue that only the euro can prevent Spain from becoming a Third World country. If you make a responsible adjustment through wage deflation and fiscal austerity, they say, the country will emerge from the crisis stronger than ever.
But will he manage to leave? By renouncing the peseta, Spain also relinquished control of the national monetary policy, largely as countries governed by the gold standard system at the end of the 19th century. And, like them, the low competitiveness of their exports means that they now have to go through the same difficult adjustments to reduce prices.
The cost will be great. According to the American economist Barry Eichengree, with the gold standard the weight of the adjustment was borne principally by the workers through unemployment and low wages. The political emancipation of workers in the 20th century, adds Eichengreen, prevents Western democracies from returning to gold, because in a modern democracy workers rightly refuse to pay that cost.
If Eichengreen is right, it is likely that Spanish workers will also refuse to pay the cost of keeping the Euro. Now, leaving the eurozone, will condemn Spain to the long-term economic decline? Almost certainly, no. A similar debate took place in France many decades ago, which may shed some light on current problems.
After the First World War, which blew up the monetary agreements of previous years, Paris faced the question of what to do with the franc. At the same time as most countries, France went through a serious inflation during the war that made it difficult to return to parity with prewar gold, largely as it has been during the last decade with Spain, where inflation in relation to Northern Europe has made the country not competitive at all.
At the beginning of the twentieth century, it was widely accepted that a serious country had to maintain itself in the gold standard system. It was considered that not doing so was irresponsible and condemned the country to economic stagnation. For much of the first half of the 1920s, France struggled with all its might to return to the gold standard according to the prébélico exchange rate.
However, he could not do it. Inflation eroded the value of the franc so much that the French industry stopped being competitive; and, in the first half of the decade, the country suffered from high unemployment and low growth. In 1928, I yield to the inevitable and in the middle of the political case, President Poincaré devalued the franc.
France's capitulation to monetary irresponsibility mortified its bankers and earned him the scornful insults of Britain and the rest of Europe. Reliable predictions were made both in France and abroad that the national economy would plunge into inflation and stagnation.
It was not so. In reality, the French economy recovered. In fact, the devaluation of the franc was not an act of irresponsibility, but a simple late recognition of a monetary reality.
Moreover, while France's competitors struggled to maintain their overvalued currencies, French economic results soon overtook those of rival countries. When much of the world was dragged into the 1930-31 crisis, the country remained largely immune to the deep depressions suffered by the United States, Great Britain and most of the industrialized world.
Other countries ended up being forced to devalue their currency and Paris maliciously condemned the irresponsibility of those same countries that had criticized France a few years before. With the gold accumulating in the Bank of France gravia to an already strong export sector, France once again saw itself with pride as a global guarantor of monetary rigor.
It was a mistake, an error that the historian Tom Kemp called "almost pathological addiction" to monetary orthodoxy. As one country after another devalued its currency in the early 1930s (the United States eventually did so in 1934), France's competitive position weakened rapidly, although the country remained firm in its position of not resorting to new to a devaluation.
The French economy then began to resent strongly. While the rest of the world adjusted its currencies, France suffered again deflation, low wages and unemployment; This infuriated the workers, weakened the ecomony and brought the country to the brink of economic and political collapse.
When the world recovery began in 1934, the situation in France only worsened.
In 1936, Paris was unable to maintain the value of the franc and was ignominiously forced to abandon the gold standard again.
The cost of the wait was enormous. In the end, France was one of the countries most affected by the Great Depression.
And all the suffering was vain. The country was forced to a new devaluation; and, when he did, he had to drag the additional burden of closed factories, furious workers, and poor infrastructure.
What lesson can be drawn for Spain? At least two. The first is that the ability to direct national monetary policy constitutes a very important political instrument, even though often irresponsible leaders have abused it.
By pathologically clinging to the euro, Spain is placed in a position of enormous disadvantage against Germany and other countries with surplus capital from Europe and the rest of the world.
As was the case with France's attachment to gold in the 1920s and 1930s (which seemed responsible at the time, but which in retrospect turned out to be wildly foolish), Madrid's desperate struggle to keep the euro for as long as possible will not seem one day a heroicity but a madness. The euro does not serve the Spanish economy as it is organized today, and refusing to recognize it is not a sign of maturity or responsibility.
he second lesson is that the attachment of bankers and economic policymakers for responsible monetary behavior is not always justified. The economic cost of maintaining an overvalued currency during a period of weak global demand can be so high that it weakens the very credibility that is sought with this monetary rigidity. Spanish and foreign investors will not applaud a Spain that clings heroically to the euro if the economy shatters and unemployment remains high for years.
Not only the case of France illustrates that danger. During the 1920s and 1930s, countries that had previously abandoned the gold regime also left before the Great Depression. The longer a country defended its currency (as happened with the United States, France and the Gold Bloc countries), the worse the consequences.
In a long-term global contradiction, inflexibility harms growth and even credibility. Spain should learn from history. There is no doubt that participating in the euro has advantages, but the history of monetary unions indicates that the benefits only exist during periods of rapid global growth and increasing liquidity. When the cycle of globalization ends, monetary unions always collapse.
Europe is not an optimal currency zone; and, in a world with weak global demand, the cost to Spain of submitting to the monetary and fiscal needs of Germany will be very high. And all for what? After years of effort, Spain will be forced to abandon the euro anyway.
The later in doing so, as the case of France teaches us so clearly, the greater will be the sufferings.
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