When Friedman and Krugman agree

Lots of people now understand that the euro was a very serious mistake.  But most still don’t understand just how badly the project was botched. Let’s start with the obvious.  If you are going to launch a grand experiment in monetary policy (like NGDP targeting for instance) you need a back up plan if it fails.  My back up plan would be to return to the previous policy.

But the EU did not provide for any backup plan.  There is no procedure to unwind the eurosystem if it failed.  They simply assumed it would work. They acted like they were 100% certain it would work.  That’s not really a good idea, even if the experts were unanimous that the project would succeed. Experts might be wrong. But in this case it was far worse. Many of the world’s leading experts thought it was a horrible idea, and predicted exactly the sort of disaster that has arisen.

There are probably a few times in my life where I’ve felt that both Paul Krugman and Milton Friedman were wrong about some issue, and that I was right. Maybe I’ve even said I was “sure” they were wrong.  But suppose God put a gun to my head and threatened to fire if Friedman and Krugman were right. Would I still say I was “sure” they were wrong?  The point is so obvious that it really shouldn’t even need making; if leading intellectuals on both sides on the ideological spectrum think an idea is crazy, then policymakers must at least entertain the idea that there is at least a small probability that the idea is indeed crazy. They need a backup plan. The Eurocrats (with the French in the lead) were not willing to entertain this sort of uncertainty.

Would a backup plan have been difficult to devise?  I can’t imagine why; we already know how easy it was for countries like the US to devalue during the Great Depression.  They would simply have needed to allow for a similar fallback plan.  This would have involved holding onto the old currency when it was withdrawn from circulation, and printing new currency at the normal pace, and putting it into storage for an emergency.  Then there would be a provision that if the country reverted to the old currency, the bonds and bank accounts would automatically be converted over as well.  In that case Greek bonds and bank accounts would have continued to price in devaluation risk, as they did before 2000.  If the euro were a success, then the risk premium would gradually fade away over time.

This sort of fallback plan would have allowed the euro to be unwound in a crisis, in much the same way that Britain and Sweden left the EMS in 1992.  A bit messy, but nothing like the crisis we are now facing.  But the Eurocrats who dreamed up their perfect monetary system were too arrogant to even entertain the prospect of failure.  And now we pay the price for that . . . what’s the Greek word?


Update:  One commenter suggested that my previous post left the impression that I don’t like Greek culture.  Not true.  Although I’ve only visited Greece once, based on my impressions I prefer Greek culture to American culture (yes, that’s a low bar.)  I prefer American attitudes toward capitalism, but overall I prefer Greek culture.  It’s a wonderful country.  Apologies to any Greek readers if my post left a bad impression.



64 Responses to “When Friedman and Krugman agree”

  1. Gravatar of harumpf12 harumpf12
    6. July 2015 at 05:28

    The Euro is working exactly as it was planned to work: Cause one or more crisis that force the destruction of the national states of Europe and place all power in the tyrannical hands of EU “representatives”, bureaucrats and apparatchiks.

    This goal was deemed to be impossible to achieve politically in the time frame desired by the “architects” of the EU, so they forged a “currency union” without a real political union fully knowing that it could not work. They assumed that in time it would force political an economic union.

    The is the real truth about Greece, and this is the “fallback plan”.

    Greece has a tiny economy, and great deal of their debt has been pushed off to the taxpayers of the member state. There will be no great catastrophe outside of Greece if they default or leave the Euro. from the EUcrats POV, this is all just so much theater.

    No matter how this works out with Greece, so you will see the EU pushing for further “economic” integration, which of course will mean the gradual destruction of the Member states control of their financial regulations, central banks, and, ultimately their economy. They may yet get away with their project.

  2. Gravatar of Brian Donohue Brian Donohue
    6. July 2015 at 06:05

    Scott, I recall upon the introduction of the Euro, that borrowing rates among Euro member countries basically converged for several years.

    In retrospect, this was obviously a mistake and/or a misunderstanding among investors regarding who was underwriting what, right?

    I feel like some of the headiness associated with low borrowing rates (and throw in an Olympics) have ultimately caused a lot of pain in Greece.

    Related question: on balance, how much has the country of Panama gained/suffered vis a vis its neighbors due to monetary inflexibility?

  3. Gravatar of collin collin
    6. July 2015 at 06:07

    Outside the Middle East, one aspect of the world that is true is the Civil and nation wars have diminished a lot. So when nations hit rock bottom they don’t have revolting peasants of yesteryear, they have bankruptcy and devaluing. And it appears that what the Euro at least needs is a national bankruptcy court as the decisions share the pain, are relatively quick and decisive.

    One aspect of the three nations failures that is true (Greece, Ukraine, and Puerto Rico), is all three nations have falling populations. (Yes, Ukraine was hit by Civil/Nation War but had Ukraine had been able to pay Russia full price for gas, it might have been avoided.) I know fallling populations is not only problem here as other economic strengths(ie Japan) can cover up this issue, but falling populations does make a nation’s fundamentals weaker.

  4. Gravatar of benjamin cole benjamin cole
    6. July 2015 at 06:22

    Excellent blogging.
    Gadzooks. Greece is trapped in a financial burning house with no exits.
    Sad–and worse, no tsunami or holocaust has wiped out Greek infrastructure, factories, farms.
    They are suffering for no reason–only invisible financial goblins invented by man.
    Central banking cannot be left in the hands of central bankers. Would you leave USDA policy in the hands of farmers? How about having the Joint Chiefs of Staff determine the defense budget and whether we go to war?
    And the ECB is even less answerable to anybody than the Fed!
    No sovereign nation should ever give up control of its central bank. The ECB will always make policy for Germany and not Greece. A Grexit is inevitable.
    The Greeks should become more competitive – – – you know the way the USA cut back on our domestic spending in our recession….well,
    as in our Great Depression, when Americans embraced capitalism as a savior…those Greeks have to follow our example…

  5. Gravatar of Jim Glass Jim Glass
    6. July 2015 at 07:08

    “But the EU did not provide for any backup plan. There is no procedure to unwind the eurosystem if it failed. They simply assumed it would work.”

    Worse than that, they believed that not having a backup plan would help guarantee it would work. If there was a legit way “out” of the euro then someone sooner or later would try to use it, creating a potentially big problem, but if there was no legit way out … no problem!

    “We’ll build our ship with no lifeboats, and then we’ll be extra plus careful against accidents, so there can’t be any. Peltzman effect!

    “And since there can’t be any accidents after that, we’ll be able to go zooming across the North Atlantic ice fields at record speed. Greatest ship ever!”

    After all, they were following the proven precedent of the USA, which also was created with a constitution that didn’t provide any way for anyone to leave, and became by far the most successful polity in the world. No problem!

  6. Gravatar of Majromax Majromax
    6. July 2015 at 07:08


    > Sad-and worse, no tsunami or holocaust has wiped out Greek infrastructure, factories, farms.
    >They are suffering for no reason-only invisible financial goblins invented by man.

    Not exactly. Greece does have real-economy problems.

    Take moeny out of the equation, and imagine that taxes and pensions were instead transfers of real goods. Between a legacy of tax evasion and generous pension systems, the Greek government is promising to transfer more wheat to pensioners than it can collect in taxes — that is to say it’s running a primary deficit.

    The financial problems enter into this because the nation has to rely on foreign capital to make those real-terms ends meet, and that foreign capital gets rightly ticked off if it thinks its loan may vanish.

    In retrospect, I think the best outcome of these negotiation would have required that the Syriza government maintain a small primary surplus. From that position, it would have the power to tell its creditors to go fly a kite, since the Greek issue would be liquidity rather than solvency.

  7. Gravatar of Both Krugman And Friedman Said The Euro Was A Stupid Idea: But They Did It Anyway, Didn't They? – MorningStandard.com Both Krugman And Friedman Said The Euro Was A Stupid Idea: But They Did It Anyway, Didn't They? - MorningStandard.com
    6. July 2015 at 07:20

    […] An interesting comment from Scott Sumner on this: […]

  8. Gravatar of J.V. Dubois J.V. Dubois
    6. July 2015 at 07:23

    I agree but I also disagree. Euro was since start a political project. Even now in Greece Euro has over 80% support among people.

    Now consider what Friedman said about Eurozone:

    “Europe exemplifies a situation unfavourable to a common currency. It is composed of separate nations, speaking different languages, with different customs, and having citizens feeling far greater loyalty and attachment to their own country than to a common market or to the idea of Europe.”

    Interesting. First I see a huge support for Europe and common market. Certainly larger than in 1970ies or 1980ies. Second, I wonder how Friedman would feel about USA as optimum currency area in different stages of its history. There are many countries in unions/federations/confederations that feel similarly. As a latest example – if Scottish people or Catalan people put their country before the union they live in, does it mean that they should have their own currency? And we are talking only about western countries.

    What if we talk about countries like India? There 122 major languages and over 1000 other languages. There is completely different culture, religion, language and customs over the country. Does this mean that India should adopt multiple currencies? There is multitude of other examples including question if US was in the past or even is right now optimum currency area.

    Whichever way you look at this it seems that most of the time currency is seen as a strong political symbol, something that has much larger significance than gold standard. So it is really hard to say if it is or isnt a failure.

  9. Gravatar of MFFA MFFA
    6. July 2015 at 07:44

    In game theory sometimes you increase your chance of succeeding by limiting your options (think about Cortez burning/sinking his ships before taking over the new world -> his soldiers had to fight because there was no way out). Wasn’t that what was at play here?

    Of course it could be that what was increased by not having a plan b was only the public buy in, as it would have been a much harder sell if it came along with complicated contingency plans.

  10. Gravatar of Jim Glass Jim Glass
    6. July 2015 at 07:58

    Euro was since start a political project. Even now in Greece Euro has over 80% support among people.

    Populist politics can make terrible economics. Communism … rent & price controls, protectionism … constitution-violating Greek referendums after the politicians promise the people it will get them up and down at the same time and a pony too.

    I see a huge support for Europe and common market.

    Free trade, single currency, two very different things.

  11. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    6. July 2015 at 08:10

    There’s no guarantee this will end peacefully either. Greece has a relatively recent history of civil war and near civil war. Its Constitution only dates back to the 1980s.

  12. Gravatar of Alex Godofsky Alex Godofsky
    6. July 2015 at 09:00

    Scott: but allowing euro deposits in Greek banks to trade at par with euro deposits in German banks was part of the goal.

  13. Gravatar of econ man econ man
    6. July 2015 at 09:35

    nice post

  14. Gravatar of John Hayes John Hayes
    6. July 2015 at 09:48

    Alex, they aren’t the same currency because they don’t actually have the same guarantees. Account deposits are insured by the national central banks not the ECB which has a more limited mandate for providing liquidity. Europe has managed to recreate the “free banking era” of the US at a national level. Difference is free banks actually discounted each other bills according to perceived solvency while the Euro area banks cannot.

    It’s no surprise the Euro has very high support among Greeks, the alternative is an instant reduction is Euro assets including Euro denominated contracts. Imagine you have a contract to sell at a Euro rate converted to New Drachma but another contract to buy at a Euro rate that doesn’t. Further imagine you have a government that will try to impose price controls for all selling prices that don’t have a forward contract. It’s only sane to vote against that outcome.

    To paraphrase Benjamin Cole, Greece is a burning house and the only way out is the sewer.

  15. Gravatar of Blue Eyes Blue Eyes
    6. July 2015 at 09:51

    Scott, your sensible proposal sounds similar to the British suggestion at the time the Maastricht Treaty was being negotiated, for a “common currency” rather than a “single currency”.

    The idea that a hard Ecu would circulate and trade alongside the national currencies, as a competitor to them, with the aim of making intra-EU trade more efficient *and* keeping the national authorities keen (because it would be easy to see who had been inflating).


  16. Gravatar of Tom Brown Tom Brown
    6. July 2015 at 10:00

    Wow, I love this post Scott. Great comment about “back up plans.” It gets to one of my favorite subjects recently: how do we know what we know, and how do we assign confidence to it? Basically epistemology.

    It seems the Eurocrats used an unreliable (i.e. low or no evidence based) epistemology, and doubled down with 100% confidence (which is sadly typical for people using unreliable epistemologies). I’m a fan of “street epistemologists” (no joke: they exist and they’re the exact opposite of street preachers) who by means of a few minutes of Socratic style questions can often induce people to re-examine their unreliable epistemologies, and move from 100% to something lower (the 1st step in discarding those unreliable epistemologies altogether).

    As an outsider to the field, just looking at the diversity of strong expert opinions (basic smell test), it’s hard to imagine that an honest macroeconomist could be much more than ~70% confident in ANYTHING.

    “The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt.” — Bertrand Russell

  17. Gravatar of ssumner ssumner
    6. July 2015 at 10:13

    Brian, Good points. I have to admit that I did not anticipate Greece defaulting. I don’t recall ever seeing a developed country defaulting, and was lulled into thinking that their debt was safe.

    Panama is an interesting case. They seem to have become a banking center, and the dollar may be useful in that context.

    Ben, You said:

    “Central banking cannot be left in the hands of central bankers.”

    Even more importantly the politicians need to understand what is going on. They don’t even realize the ECB ran a contractionary policy, as they were too focused on low interest rates.

    Jim, Excellent point. It reminds me of the Doomsday Machine in Dr. Strangelove.

    JV, I agree that it is difficult to draw the line. But we now know that the line was drawn in the wrong place. Ex post, we know that Friedman was right about the eurozone. I don’t know enough about Scotland to know whether it would need a separate currency, but I do know that Greece and Germany should not share the same currency.

    MFFA, That’s a good analogy, but I still think the costs outweigh the benefits of “burning the ships”

    Alex, Good point, but as we can see Greece is still in the euro, and yet the two deposits are not viewed as equal. Better to explicitly face up to that risk.

    Blue Eyes, Interesting idea.

  18. Gravatar of ssumner ssumner
    6. July 2015 at 10:15

    Tom, The only thing that I’m more than 70% sure of is that Ray is wrong about everything. 🙂

  19. Gravatar of J.V. Dubois J.V. Dubois
    6. July 2015 at 11:28

    Scott: Should Greece and Germany share the same currency? Should Slovakia and France share the same currency? Should Belgium and Estonia share that?

    It is hard to say, but not only about common currency. Just one example and sorry for taking it a little away, but it will connect later: should Bulgaria and Germany have freedom of movement of capital and workforce between themselves? Friedman would probably say yes. But in practical sense many eastern europe countries lost a whole generation of young people to emigration, especially after 2000. Bulgaria, Estonia or Lithuania lost 10% of their population to emigration on top of already slowing demographic growth. And unlike internal emigration between US states there is no federal government who will pay pensions and healthcare for remaining old people in respective Eastern European countries.

    There are however also success stories. As part of acceptance criteria all eastern european countries had to do many pro-market reforms ranging from agriculture to judicial system. One such example can now be seen in Romania where coruption was so prevalent that it required separate negotiation with EU. So Romanian government created anti-corruption unit to be accepted to EU that was hugely popular among voters. Only fortunatelly (and unfortunately for some politicians) it worked so well that it Romania now features in global media for its anti-corruption efforts and other countries go there to learn how they did that. Of course Romanians still have long way to go but it worked.

    EU now serves as a stabilizing factor in many countries. If you have read about excesses of austrian populist Jorg Haider or hungarian Viktor Orban – they are still moderated by EU. The idea of EU and belonging is very strong among voters at least in Eastern European countries and many politicians have to tread carefully when engaging this topic – even in failed Greece.

    So to summarize I think you have to take good with bad. For better (and probably for worse) Euro is very visible symbol of european economic prosperity for many poor countries for years to come. For come countries like baltic states who have aggressive neighbor Euro is serves important national secuirity status as a strong signal of belonging to a particular civilization. I think European monetary policy is wrong. But I still refuse to say that Euro is a failed project. Because it is a political project and I yet have to see a thorough analysis that would make sound arguments taking everything into account.

  20. Gravatar of TallDave TallDave
    6. July 2015 at 11:35

    They believed they couldn’t have a backup plan, and this crisis illustrates why: to contemplate the possibility of failure was to make failure much more likely.

  21. Gravatar of TallDave TallDave
    6. July 2015 at 11:36

    BTW I do think they knew there was a good possibility it might fail. In fact, had they been more sure it would work, they might have had a backup plan.

  22. Gravatar of Doug M Doug M
    6. July 2015 at 11:42

    Why is there a run a Greek banks?

    Okay, I understand the run on Greek banks…If you are a greek citizen and there is a threat that the government will convert you Euro denominated bank accounts to new Drachma, you want to get your money out of the country….

    But, just because the Greece leaves the Euro, would accounts automatically be converted to new Drachma? Why?

    Which gets to another question, why are there “Greek Banks” and not some collection of multi-national banks that operate across the Eurozone?

  23. Gravatar of TallDave TallDave
    6. July 2015 at 11:54

    But, just because the Greece leaves the Euro, would accounts automatically be converted to new Drachma? Why?

    Because if you show up and want euros, they don’t have any.

  24. Gravatar of Doug M Doug M
    6. July 2015 at 12:08

    “I don’t know enough about Scotland to know whether it would need a separate currency.”

    In one freak sense, they already do. Scottish Banks have the right to print their own currency. So, at any given time, you may find 4 different 5 pound notes in your wallet. All of them are generally accepted as having the same value — 5 pounds is 5 pounds.

    But if you take your Scottish notes to England, they may not be accepted. Scottish pounds are not “Legal Tender.” That is, no one is required to accept any particular printing of Scottish pounds as payment. In fact, there is no legal tender in Scotland, including Bank of England notes.

    As far as Scottish independence, the previous proposal was for Scotland to keep the pound as its official currency. There was some discussion whether they would need to create central bank that would maintain a peg between the Scottish pound and the English pound, or if they could get by with no central bank at all.

  25. Gravatar of Christian List Christian List
    6. July 2015 at 12:11

    It’s bad that the creators of the euro did not think of a backup plan. It’s even worse that European leaders like Merkel did not develop a backup plan until the very day even though they knew since at least since 2009 that they might need one.

    One reason for this non-action is sheer incompetence.

    The other reason is that the Eurocrats think of a backup plan as a reversed Doomsday Machine. Or as Dr. Strangelove put it: “Of course, the whole point of a Doomsday Machine is lost, if you keep it a secret! Why didn’t you tell the world, eh?”

    The Eurocrats think exactly the other way round: They honestly think having a backup plan will increase the chance of a Grexit. So they are *smart* and do not develop a backup plan in the first place. Very clever, isn’t it?

  26. Gravatar of Doug M Doug M
    6. July 2015 at 12:12

    Tall Dave,

    “Because if you show up and want euros, they don’t have any.”

    Why not? Are you telling me that Greek banks hold exclusively Greek Government debt as their reserves? That would be some damn stupid policy. They should be holding a basket of Euro-denominated reserves from across the EZ.

  27. Gravatar of Brian Donohue Brian Donohue
    6. July 2015 at 12:12


    Maybe Panama is a special case, but several countries (e.g. Ecuador and El Salvador) use the dollar as their currency now, despite no fiscal union, free movement of labor, or obvious cultural affinity with the USA.

    It seems to me there is value to some countries in being able to guarantee monetary stability this way, which may be more valuable than the ability to manage AD with monetary policy, and it might be useful to look at the experience of these countries to better understand what monetary policy can and cannot do, for good and ill.

  28. Gravatar of Christian List Christian List
    6. July 2015 at 12:24

    @J.V. Dubois

    I don’t know if you really have to take *everything* into account. You are saying for yourself that the euro is a politically project. Maybe it’s more than enough to know that purely political projects that ignore fundamental economic facts will always fail in the end?

  29. Gravatar of collin collin
    6. July 2015 at 12:49

    Although I’ve only visited Greece once, based on my impressions I prefer Greek culture to American culture (yes, that’s a low bar.) I prefer American attitudes toward capitalism, but overall I prefer Greek culture.

    How can you separate a culture and attitudes towards capitalism? I would think attitudes towards capitalism is A BIG PART of culture? I would lot of the poor aspects of US culture are the other side of the coin on the view of capitalism.

  30. Gravatar of Andrew_FL Andrew_FL
    6. July 2015 at 13:29

    @Doug M-On Scotland, an independent Scotland on the the pound sterling would function more like Panama on the Dollar than Greece on the Euro.

    Which brings me to…

    @Brian Donohue- As George Selgin pointed out, there’s a fundamental difference between the Eurozone and the Dollar zone (and why the Dollar zone works and the Eurozone does not):

    “The reason the Eurozone is a mess is because the Euro isn’t the German mark-that is, because it’s a multinational currency supplied through a multinational central bank, rather than a national currency that happens to be employed by several nations. Creditors to profligate Eurozone nations, or to irresponsible Eurozone banks, have therefore had reason to hope that the ECB might ultimately come to their aid, and especially so since the Growth and Stability Pact became a dead letter in 2003. Creditors to dollarized countries, on the other hand, have no reason to count on Fed bailouts. Were either Ecuador or El Salvador unable to service its debt, or were a Panamanian bank teetering at the brink of insolvency, it would be of no concern to the Fed, or the FDIC, or any other U.S. government agency. Dollarized or not, Ecuador, El Salvador and Panama have to manage on their own.”

  31. Gravatar of Brian Donohue Brian Donohue
    6. July 2015 at 13:50

    Thanks Andrew_FL. Yeah, I was thinking about this:

    “Creditors to profligate Eurozone nations, or to irresponsible Eurozone banks, have therefore had reason to hope that the ECB might ultimately come to their aid…”

    As I mentioned in my original comment, there seems to have been some confusion all along as to who exactly was underwriting what. The convergence in yields among Eurozone countries after the currency was adopted points to the hope to which your refer, but the divergence in recent years says the opposite, doesn’t it?

    I am sure that the Fed does not consider the Panamanian economy for one minute when choosing a monetary policy. Greece, on the other hand, should at least by a consideration for the ECB, so the Greek monetary straitjacket seem less snug than Panama’s or Ecuador’s.

    In the past few years, I’ve gone from an almost hardcore Austrian view of money to basically Scott’s view, but the presence of countries that voluntarily give up monetary control and don’t seem overly hobbled suggests that, in some cases, monetary stability may be more useful than monetary independence, that’s all.

  32. Gravatar of TallDave TallDave
    6. July 2015 at 14:10

    Doug — The Greek banks literally don’t have any euros, or soon won’t. And no one will give them any. Your account might as well be in Mayan currency, or Klingon, for all the good it does you in Greece right now. But the banks might get some drachmas if the government prints some and gives it to them.

    Greece can actually keep using the euro if they want, it’s just really hard to imagine they would when they can’t borrow euros but can print drachmas.

    They might even try IOU scrip first, that should be fun.

  33. Gravatar of Doug M Doug M
    6. July 2015 at 14:49

    If there is a run on a bank, there is a run on the bank, and it doesn’t matter if that bank is in the Greece, or Mexico city, or Romulus, or the United States.

    Buy that still doesn’t answer the question of why there are so many provincial banks in Europe that operate exclusively in one country and not across the currency region. Nor, is it reasonable to assume that if Greece exits the Euro, that Greek citizens should automatically have their Euros confiscated.

  34. Gravatar of Don Don
    6. July 2015 at 15:37

    A fallback plan that involves switching to paper only currency is not a good plan. Is a difference having old paper verse newly printed paper? If not, then the fallbck plan is: drop the Euro and print a bunch of new money, which is worse-case scenario.

    I think it is more likely that Russia gets another warm water port and Greece starts making their payments…

  35. Gravatar of Jean Jean
    6. July 2015 at 16:00

    Scott, I have clashed with you before on this, but I’m going to try and explain what happened one more time. When the Maastrict Treaty was signed (euro creation) it was written into the rules that NO money from one country could be used to buy debt from another country.
    About the time that the euro came into existence (mass circulation) Gerhard Schroeder was elected as prime minister in Germany. The German central bank has followed ISLM since the end of WWII – in all that time they’ve never heard of the equation of exchange. When Schroder’s labor reforms went into effect AD collapsed within Germany, so German banks made loans to the periphery European countries, where growth was higher. All of those now houses and apartments on the periphery needed washers, dryers, etc., which were manufactured in Germany. But because the Germans were using the gold standard, every year that the euro existed it was getting tighter and tighter. Finally,

  36. Gravatar of Jean Jean
    6. July 2015 at 16:07

    Finally, in the second quarter of 2007, the periphery went into recession. There weren’t enough euros in circulation. Everybody thought it was a normal recession, until the ECB raised rates in July of 2008. At this point the German banks pulled almost all existing euros backs into the German banks, and what had been a recession on the periphery was turned into a depression.
    The Fed was too tight – but that July decision from the ECB led to a catastrophe – the German banks, after the July decision, did not want to hold euros. They wanted to hold the German 10 Bund – and US dollars. Monetary policy was already tight in the US, and then we got huge European demand for dollars after the July decision.

  37. Gravatar of Jean Jean
    6. July 2015 at 16:11

    One thing I should have made clear – almost all of the interest paid into German banks accounts since the euro became common currency has been earned in the periphery countries of Europe – the countries that the Germans now call the PIIGS.

  38. Gravatar of Major.Freedom Major.Freedom
    6. July 2015 at 16:17

    The best social plan, the only social plan that will never fail, is NO social plan whatsoever.

    The greatest economic myth that prevails the world over, believed by almost all people, is that there needs to be a social plan.

    All social plans in history have failed. And by failed I don’t mean abanonment, I mean the plan did the opposite of what was intended.

    Never in history has any social plan worked, nor is there any social plan that will work. A social plan is nothing but the violent negation of individual planning.

    Having a “back up plan” won’t do, because that back up plan would itself need a back up plan. It is turtles all the way down.

    Sumner is not being consistent when he says he is in favor of a back up plan of the plan immediately preceding NGDPLT, I.e. price level targeting. Price level targeting has been labelled by Sumner as itself a failure, which is why he is calling for the new social plan of NGDPLT.

    I don’t want, I don’t need, and I do not welcome, anyone’s “plan” for my own life, in whole or in part.

    You want to talk about hubris? Look at Sumner and his hubristic NGDPLT, in which he is willing to sacrifice the well being of billions of people, all for the sake of his hubristic grand vision for everyone and self I aggrandizement. He never asked me if I want NGDPLT imposed on me by law. No, he just hubristically assumed “it is for my own good”.

    Socialists like Sumner are so hubristic they don’t even know they are hubristic.

    If you want to know who are society’s non-hubristic people, you look to the people who don’t want to run your life through government violence and coercion.

  39. Gravatar of benjamin cole benjamin cole
    6. July 2015 at 16:21

    Majormax: I agree with you. Of course Greece would have been better off running a balanced budget all along. And an conomy more weighted to the private sector.

    But what present day policy makers seem to forget, is that voters never migrate towards free enterprise in the depths of a recession or depression. Consider US history. And in fact in the last recession food stamp, disability and unemployment rolls exploded in the United States, and we ran huge deficits—but the Fed printed up $4 trillion dollars, called QE.

    Now we are calling for Greece to run a balanced budget in the bottom of a depression well the ECB keeps money very tight.

    That is called being eviscerated by invisible financial goblins.

  40. Gravatar of ssumner ssumner
    6. July 2015 at 16:44

    JV, Lots of good points, but to be honest the main foreign policy advantage to the Baltics comes from the EU, not the euro. I’m a fan of the EU, and share Britain’s vision of a not too intrusive EU. The euro is clearly a net negative, the EU does fine without it. Look at Denmark and Sweden.

    Doug, The banks are likely to fail if there is Grexit.

    Brian, I’ve never really seen a convincing theory of why some single currencies work and some don’t. Mundell is the expert, but he got the euro wrong.

    Collin, You said:

    “I would think attitudes towards capitalism is A BIG PART of culture?”

    Not in my view.

    Jean, Yes, the July 2008 rate increase was a disaster. I don’t follow your other comments, the Bundesbank seemed more monetarist than Keynesian.

  41. Gravatar of Tom Brown Tom Brown
    6. July 2015 at 16:48

    @TallDave, you write:

    “They believed they couldn’t have a backup plan, and this crisis illustrates why: to contemplate the possibility of failure was to make failure much more likely.”

    “BTW I do think they knew there was a good possibility it might fail. In fact, had they been more sure it would work, they might have had a backup plan.”

    You make it sound like they were using the logic of either hucksters or the delusional.

  42. Gravatar of Tom Brown Tom Brown
    6. July 2015 at 16:52

    @benjamin cole: It’s “Majromax” not “Majormax.” That’s the way he spells it at Nick Rowe’s site too.

  43. Gravatar of Max Max
    6. July 2015 at 17:36

    Instead of switching to the euro, the euro members could have continued to peg their national currencies to the euro forever. That would make exit relatively easy – simply drop the peg. The downside is that pegs are subject to speculative attacks, so the ease of exit has a cost. And if you’re truly committed to not exiting, then you are paying the cost of the exit option without getting any benefit.

  44. Gravatar of Andrew_FL Andrew_FL
    6. July 2015 at 18:11

    @Brian Donohue- Oddly I’ve probably had a journey over the past few years that’s almost the mirror image of that, but I’m probably not that far from where you are now.

    And yeah, I’d say the scales have come off some eyes about the reality of the Eurozone. That decline in hope for the ECB to come to the rescue probably came too late for people to no longer need the rescue they’d been counting, though.

  45. Gravatar of benjamin cole benjamin cole
    6. July 2015 at 22:57

    Heavens to Murgatroy! Dudes, you still don’t get it. And the ECB is worse than clueless.

    Voters do not pull the lever for capitalism and free markets at the bottom of a recession or depression. Voters like free enterprise when there are chronically tight labor markets. When you hear lots of sniveling and whining about “labor shortages” then monetary policy might be expansive enough.

    Print a lot of money. Bring on boom times in Fat City and then we will see the Greek citizens talk about free enterprise and a smaller public sector.

    That applies to the US as well.

  46. Gravatar of Larry Larry
    6. July 2015 at 23:14

    3. Does the Greek government secretly want to leave the eurozone? That seems like the most plausible explanation for their erratic behavior, although I can’t be certain.

    I’d believe it except for Varoufakis and what happened to him. I’m guessing that Tsipras is completely done with “game theory” and is thinking “that a——“.

    4. Even if Syriza secretly wants to leave the eurozone, they clearly prefer to stage-manage things so that it looks like they were pushed out. And if the Germans secretly want Greece out, they’d prefer to stage-manage things so that it looks like Syriza is to blame. This may take a while to play out.

    The liquidity problem in Greece is going to speed things up.

    5. Is it possible that Greece will remain in the euro, despite all of this? In Europe, anything in possible. Keep in mind that in macroeconomic terms “leaving the euro” means changing to a different medium of account. As long as the euro is Greece’s medium of account, it’s still in the eurozone in a macroeconomic sense. It doesn’t really matter whether the Bank of Greece no longer has a seat at the table. Thus issuing “script” won’t do much to help their labor market recover, unless it takes the form of disguised wage cuts. (Greece may join its neighbor to the north Montenegro in being a de facto euro member, but not a de jure member.)

    If the government starts paying in something other than Euros, I’d say they’re out. Of course, Syriza’s incompetence may mean that the New Drachma may become worthless and that, like Zimbabwe, they switch back to a stable currency like the Euro, albeit after a monster haircut. I kind of think that’s the most likely outcome.

    6. Although I would have voted yes no, I certainly wish them well. Leaving the euro would certainly produce one undeniable benefit””more NGDP! The truly nightmare scenario is that Greece stays in the euro and becomes increasingly statist””a failed state. In my view leaving the euro with Syriza in charge is worse in the short run, better in the medium run, and worse in the long run (as in Argentina), as compared to a yes vote.

    I can’t justify a Yes. It would have fixed nothing. Can-kicking is so 2007, 2008, 2009, 2010, 2011, 2012, 2013 or 2014. A new day dawns!

    7. This slightly increases the risk of Brexit, as the eurozone will increasingly resemble a failed project.

    What really should happen is that the “north” should leave the Euro in favor of the Neuro. Let southern Europe go its own way (probably a much better monetary path in general. Inflate!)

    8. European leaders have been saying a no vote means Grexit. If on Monday they are saying something different, they will look like complete fools.

    This is the best one paragraph explanation of what this is all about that I’ve seen so far:

    And for those in the euro, exit may not be a palliative. Spain has already improved its competitiveness through wage and price cuts. A euro exit could bring with it populist polices that hurt long-term growth. “You do not leave the euro to become a market-friendly Switzerland. You leave the euro to become Argentina,” says Jesús Fernández-Villaverde of the University of Pennsylvania.

    Greece has also improved its competitiveness. Just not nearly enough.

    If this spreads across Europe, you could eventually end up with a sort of (non-violent) civil war. Neoliberal northern Europe against statist southern Europe. The best way to predict global events over the past 20 years is to assume that countries will have governments that increasingly reflect their cultural characteristics. Thus as China and Denmark becomes more capitalist, Argentina and Greece becomes more statist.

    The short-term in Greece is terrifying. Call the Red Cross. One side-effect of Greece is “encourager les autres”. Consider them encouraged.

  47. Gravatar of J.V. Dubois J.V. Dubois
    7. July 2015 at 04:39

    Scott: Very good discussion here. In the end I have to admit that I do not feel strong about Euro in general as success. However what puts me off is that the Euro is used too much, almost like an off-hand remark. “Greece should not have the same currency as Germany. Friedman and Krugman said that – optimum currency area and all that stuff”

    However there is no real analysis behind. High mobility and common fiscal policy is mentioned in these discussions. But if you look at it, there was extraordinary ammount of fiscal solidarity – even to Greece itself. Bullow/Rogoff have a nice article on Vox about Greece: http://www.voxeu.org/article/modern-greek-tragedy

    The fact is that Greece recieved around EUR 18-20 billion of net financial inflow a year since 2006 – 2013. In an economy of around EUR 200 billion a year. That is a lot of help given that Eurozone is not a fiscal union and it still not helped. Austerity measures or not, Greece really gained a lot.

    Then there are some different examples even in more homogenous entities that are still considered as optimum currency areas. Some like Italy you already covered. In the last comment I mentioned Austrian populist Jorg Haider. He was elected governor of austrian federal republic of Carinthia and his party was also part of coalition government of Austria. Besides being PR disaster Haider is also one of the chief architects of why Carinthia is Austria called “minigreece without sea”. Carinthia backed bad loans of local bank that are over 10 times of the local yearly budget. There is heated discussion inside Austria about how to get this federal state out of the mess with surprisingly the same language as is now used against Greece (reforms etc.) There are very loud voices that suggest that Carinthia should go bankrupt and that federal Government should not step in.

    Now let’s move to US and let’s talk about Detroit. City plaugued with unemployment peaking well above 20%. Detroit is part of OCA, oh yes – similar to the state of some easter European countries it maybe works too well. There was an exodus of population from Detroit to other states in US leaving Detroit with huge debts with no way to pay them. Getting help from federal government is a long stretch, jumstarting economy may be even impossible.

    So now my question: where are economists that say that failure of Detroit, Carinthia, maybe Sicilia is a failure of common currency. Would people in these countries not be better with their own currency? Detroit/Carinthia/Sicilia may not have to leave union, they can reap all the benefits of single market on top of having positive NGDP per capita growth so they can cope with assymetric shocks much more easily.

    This is my main beef with blaming Euro. You can definitelly do it and you even may be right. But why arbitrarily select just one country? If OCA is such a concept which can rally thinkers like Krugman and Friedman under one standard then it should be well worth to pursue to its limits. But then why such silence?

  48. Gravatar of ssumner ssumner
    7. July 2015 at 05:12

    Larry, Good comment.

    JV, I recently did a post discussing the southern Italy analogy (at Econlog?), so I certainly see your point. I’ve consistently argued it’s “both.” Bad supply side and bad demand side policies.

  49. Gravatar of LK Beland LK Beland
    7. July 2015 at 06:17

    It seems to me that to work well under an inflation target, the Euro zone would need its members with the strongest inflationary pressure (say Germany and Austria) to implement the most austerity. Its countries with lesser inflation pressure should implement more modest austerity.

    It seems to me that the Euro zone members are in fact implementing the exact opposite policies. In a world with monetary offset (at the EZ level), this obviously amplifies deflationary pressures in the South, rather than alleviating them.

  50. Gravatar of Njnnja Njnnja
    7. July 2015 at 06:40

    @J.V. Dubois: I can’t speak to Sicily but the parallel to Detroit has significant differences. First, cities such as Detroit are constantly being “bailed out” by receiving stabilizers such as unemployment benefits and Medicaid (health insurance for the poor). There is no debate about when this happens; it is automatic so there is little drama as there has been over Greece receiving money from the rest of Europe.

    Second, and perhaps more important, much of the problems that cities such as Detroit face are not a result of them being a government in a common currency union, but rather, as employers who promised postretirement benefits that they couldn’t afford. Greece has a pension crisis because the government promises a benefit to all workers when they retire (whether public or private), Detroit only has a problem with public sector employees since it does not pay anything for private sector employees; the government sponsored retirement program for all workers in the US is handled at the Federal level.

    However, Detroit has hired teachers, police, librarians, clerks, etc. over the years and promised them a retirement benefit that they currently cannot afford. One would not describe a private employer that found themselves in the same situation (such as General Motors) as having a problem with being in a currency union. But if the Euro/Europe were set up like the US Dollar/USA, then Greece’s private company pensioners would be paid by the rest of Europe, so the problem is the currency union without fiscal union.

  51. Gravatar of Jean Jean
    7. July 2015 at 07:58

    Scott – it’s called Tier Two capital. The Bundesbank is famous for tight money, and is convinced that a low interest rate indicates easy money. Schaeuble has even said the euro is easy! They must be relying on ISLM, rather than m.v = p.q.

  52. Gravatar of Majromax Majromax
    7. July 2015 at 08:01


    > But what present day policy makers seem to forget, is that voters never migrate towards free enterprise in the depths of a recession or depression. […]

    > Now we are calling for Greece to run a balanced budget in the bottom of a depression well the ECB keeps money very tight.

    I’m not necessarily calling for free enterprise policies in Greece. I’m thinking very narrowly of negotiating options.

    Simply put, Greece cannot win if it maintains a primary deficit. Inside the Eurozone, it would be dependent on creditors that want their existing loans repaid promptly and in full; outside the Eurozone it would still be unable to access international capital and would need to rely on private savings.

    This does not necessarily call for free enterprise policies, although they would possibly help over the medium to long term. Over the short term, Greece could use something akin to a debt-equity swap, where existing payments and obligations are converted to NGDP bonds. After resuming a primary balance or surplus, Greece could then have presented the same offer to creditors on a take-it-or-take-a-default basis.

  53. Gravatar of collin collin
    7. July 2015 at 09:19

    How can somebody so easily separate culture from attitudes on capitalism? Isn’t of the one key piece of culture is how the labor and resources are distributed amongst the people? And maybe Greek culture lack of support for capitalism a product of their culture and what has happened over the centuries.

    Even if you limit cultural changes to the post-WW2, doesn’t that effect attitudes towards capitalism? Take the difference between the US and Japan. Both nations have a very strong attitude towards capitalism in their culture but some major differences. Japan culture has placed an emphasis on full labor utilization and strong national competitive economic growth (Remember Japan Inc.) where the US has emphasized more labor competitive markets and open borders towards trade. (Remember the Trump outrage about Mexico is because the US has had more open trade and labor with Mexico. Japan has such a closed border country there is little to be outraged about.)

  54. Gravatar of Steve Steve
    7. July 2015 at 10:55

    The situation in Greece could happen anywhere with a 25% NGDP hit

    Syriza = Bernie Sanders
    Golden Dawn = Donald Trump

  55. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    7. July 2015 at 11:04

    Che who?


    Of course you can’t buy with a credit card if you live in Greece.

  56. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    7. July 2015 at 11:06

    They voted for a free lunch, why not free electricity;


    ‘Greece’s electricity customers have stopped paying their bills, resulting in a cash crunch for Public Power Corporation. Daily incomings have shown a rapid decline dropping close to zero, depriving the country’s main energy company of 20 million euros per day in revenues.
    The situation is deteriorating with every day that passes, making it immediately necessary to use cash reserves to cover everyday financial obligations to contractors, suppliers, the grid operator etc.’

  57. Gravatar of Tom Brown Tom Brown
    7. July 2015 at 15:05

    @Steve, good point!

  58. Gravatar of TheMoneyIllusion » When Friedman and Krugman agree « Economics Info TheMoneyIllusion » When Friedman and Krugman agree « Economics Info
    8. July 2015 at 00:00

    […] Source […]

  59. Gravatar of ssumner ssumner
    8. July 2015 at 06:00

    LK, Yes, but even before that have a sensible monetary policy. At a minimum, hit your 1.9% inflation target.

    Jean, OK, fair point. But lots of people who think low rates mean easy money have never heard of IS-LM. It’s also possible he holds both Keynesian and monetarist views, he wouldn’t be the first.

    Collin, Culture has an almost infinite number of dimensions. Obviously attitudes toward capitalism are important for the economy, but there is much more to life than economics.

    Steve, Excellent.

    Patrick, It’s unbelievable how much the economy has deteriorated in just 6 months.

  60. Gravatar of Tom Brown Tom Brown
    8. July 2015 at 09:54

    How about when Sumner and Krugman agree? Krugman arguing for monetary offset? (Krugman on Canadian austerity in the 1990s and the lack of ill effects):

    “The answer was, easy money and a large currency depreciation. These offset the drag from austerity, allowing growth to continue.”


  61. Gravatar of ssumner ssumner
    8. July 2015 at 18:24

    Tom, When we agree we must always be right? Right?

  62. Gravatar of Bubble-monger Bubble-monger
    9. July 2015 at 11:58

    Puerto Rico doesn’t have an “exit plan” either and it’s also going “down the drain”. They simply default on their debts.

    Who’s next ? Illinois, New Jersey, California, New York, Massachusetts ?

  63. Gravatar of Bubble-monger Bubble-monger
    9. July 2015 at 12:05

    @Steve: you’re missing something. You overlooked “Rising Interest rates”.

  64. Gravatar of Matt Corbett Matt Corbett
    9. July 2015 at 12:58

    At one level you are right about building back-up plans, but there is a big incentive/game theory problem.

    If you build any system of this kind, then in order to make it ‘succeed’ one has to not build off-ramps. Once in, in order to maintain cohesion, the system depands on maximizing rather than minimizing the pain involved with leaving. Compare with say, the US Constitution. If the US Constitution gave states a process for leaving, then the country almost certainly would have split irrevocably by the 1840s.

    One of the inevitable consequences of a fixed-exchange system is a loss of policy independence. In the case of the euro, this was intentional. One of the purposes was that when a country ran into a competitiveness problem, the currency union would force said country into structural reform by taking away currency devaluation as a tool. In other words, it would force every european country into doing what Germany did in 1999-2000 or what the Nordic countries did in the early 1990’s or what Ireland did 2008-10. A primary concern of the euro architects was Italy- they wanted a future Italian premiere to have to push through labor market reform because Italy would have “no other choice”. Providing a mechanism to unwind euro membership would inevitably make exit a seriously considered policy choice whenever Italy ran into its next competitiveness problem, and one of the purposes of the euro was to make such a policy choice unthinkable because it would be so disastrous. As you point out, markets would have to price in a devaluation risk, and the euro-designers wanted that market risk premium to be zero, and more importantly for that zero risk premium be an accurate reflection of reality.

    The designers knew that a euro with an off-ramp would have devolved into a Northern europe bloc inside of a decade, with a separatist French minority playing bad cop to the sitting French government’s good cop in a continous racket to extract concessions from Germany. That was an outcome they wanted to avoid.

    “Hubris” is not quite the right word for the euro-designers. They did not foresee a crises of the difficulty of Greece’s, but they very much did see the potential for problems along the lines of that being experienced by say, Spain or Ireland. What they didn’t foresee was how resistent the Mediterranean countries would be to structural reform. They assumed the problems of southern Europe were at root about feckless and/or corrupt politicians catering to parochial interests at the expense of the general welfare. What the northern Europeans are discovering (to their slack-jawed horror) is that the resistence of Mediterranean politicians to structural reform accurately represents the wishes of their polities.

    The other reason they did not foresee a crisis like Greece was that they didn’t think a country ‘like Greece’ would ever be let in. It’s easy to forget, but Greece was only admitted into the eurozone under premises that were later exposed as a complete fraud. Lots of people assumed France had fudged its government budget figures a little bit before the euro started, but the extent of statistical/accounting fraud by the Greek government was on a whole different level. The euro-designers probably didn’t imagine such a fraud was possible.

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