‘The world is in a depression in America, Europe and Japan’.

Thursday, August 25, 2011
By Paul Martin

Professor Mundell, euro, and ‘pessimal currency areas’

By Ambrose Evans-Pritchard
August 25th, 2011

After all these years, I have finally been able to sit down for an hour with Robert Mundell, the great theorist of currency unions and the godfather of the euro.
“We’re in very serious danger. The world is in a depression in the Big Three of America, Europe and Japan, a mini-depression that we have not seen since the 1930s,” he said, speaking at the Lindau conference, where half the world’s Nobel economist are gathered on one tiny island with cobbled streets looking across Lake Constance to the Alps.
Few economists inspire such devotion and fury as Professor Mundell.
He is a hero to America’s free-market Right for sponsoring the Reagan tax cut agenda, and has not relented on that front. “Any country with public debt over 40pc of GDP needs its head examined,” he said.
His prescription for America’s ill today is to slash corporation tax to 20pc (from an effective rate of 52pc, he says), and kill the entitlement behemoth. By the way, he blames the Fed for triggering the Lehman crisis by keeping money too tight in mid to late 2008. There is very little inflation risk now from QE because M1 money velocity has collapsed “by half” and is likely to stay there.
But equally he is a villain to the eurosceptic Right on this side of the Pond, having made it a life mission to sponsor the Europe’s fixed exchange experiment. Some say he has bent the theory of “Optimum Currency Areas” (OCA) to justify combining the vastly different economies of Europe in monetary union – whatever this implies for freedom and democratic legitimacy.
If you read his own pioneering work on OCAs – “A Theory of Optimum Currency Areas” in the American Economic Review of 1961- it is hard to see how the eurozone can possibly qualify. He argued then that even Canada and the US might have benefited from a break-up into East and West dollars to reflect regional economies.

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