Competitive devaluation

A fistful of dollars (Merzperson)

Simon Heffer writes mournfully in the Daily Telegraph today of the prospects of the eurozone economy as the financial and economic crisis continues. As always, with Simon Heffer, his mournfulness is something of an act, because he is no friend of the euro and the prospect that countries might suffer as a result of adopting it would suit his worldview.

What caught my eye today was his suggestion that “no devaluation of the euro is possible to stop the haemorrhage of jobs”, as though that was a criticism of the euro. Of course, it is not. For the euro to be devalued, the major trading partners of the eurozone would have to see their currencues increase in value. Whether that happens is not just up to the governments of the eurozone but also up to the governments of China, Japan, the UK, the United States, and other countries around the world. If such a devaluation can’t happen, that is not a criticism of the euro. In fact, were there to be a more coherent means of expressing eurozone policy towards third countries, such a devaluation would be more likely to happen, as the Europeans would be better equipped to enlist the support of others.

Maybe what Simon Heffer means is that the different European countries cannot devalue their currencies against each other. Nothing has been lost in creating the euro in policy towards the rest of the world – in fact, there has been a potential gain in influence if the eurozone countries wish to use it – but it is true that the option of competitive devaluation within Europe has been lost.

But competitive devaluation within Europe does not solve an economic problem: it merely exports it from one country to another. It has the same logic and morality behind it as does dealing with your household rubbish by throwing it into the neighbour’s garden. Perhaps your neighbour is particularly good at disposing of waste and particularly happy to deal with yours also, but even if that’s the case then the waste disposal still needs to be done by agreement and there are probably better ways to do it. Some European countries may be better able to bear the burden of coping with the economic crisis than others, in which case the best solution will be found by macroeconomic policy cooperation, of which the euro in turn is an example.

It doesn’t make sense to look to a European macroeconomic policy without the euro. Unless, of course, you want to be the economic equivalent of a litterbug.

About the Author