" the euro was an inherently flawed idea that can work only given a strong European economy and a significant degree of inflation, plus open-ended credit to sovereigns facing speculative attack"
belaboring the obvious
fiscal thrust among the national member states has a ecb lid
and without flexible control of national price levels and wage levels ....
more pk
"... imagine a eurozone that contains only two countries, Germany and Spain. And let’s make two assumptions: first, Germany’s economy is three times the size of Spain’s, so that German inflation is 3/4 of the overall index, Spain’s inflation 1/4; second
.....consider two scenarios
: in scenario A,
2 percent German inflation
2 percent Spanish deflation.
overall inflation rate of 1 percent.
In scenario B,
4 percent German inflation
zero Spanish inflation
overall inflation of 3 percent.
In a frictionless world,
it wouldn’t matter which scenario gets chosen.
But in reality, scenario A, the low-inflation scenario, is vastly worse for Spain
— for two reasons. First, it’s much, much harder to get actual deflation
than simply to have stable prices, so scenario A means much higher unemployment.
Second, because Spanish debt is in euros, scenario A implies a significantly worse debt burden."
