Why the euro is doomed to fall apart: it was an incredibly stupid idea in the first place

Wednesday, May 9, 2012
By Paul Martin

Tim Worstall
May 9th, 2012

The euro is doomed to fall apart: no, not because I’m some nasty man in UKIP but because the basic idea was such a terrible one. Our chart above (which you can see more easily by clicking here) shows just how terrible it was. It would, in economic terms, have been better to have a new currency for all countries beginning with the letter M than for the eurozone. Or for all countries that have the 5th parallel North passing through them.

Yes, of course, we all know, the euro is the bright new dawn, the vital step in stopping Germany from invading France. Again. No one seems to have noticed it that they managed it last time and having experienced the place seem to have no desire at all to go back. So this might not be a problem that needs a solution.

However, let’s look behind the political posturing and ask ourselves whether, in economic terms, the euro was a sensible idea. The structure we need to help us decide is Robert Mundell’s concept of an Optimum Currency Area. We should look at things like language barriers, labour mobility, capital, the similarity between economies, their reaction to external shocks – essentially what has been worked out for us in that chart.

And, as you can see, it’s a blitheringly stupid idea to try and push countries into the same currency just because they happen to be next door to each other. People would have been better off if we’d insisted that the c. 1800 Ottoman Empire had the same currency again: Tunisia, Turkey, Israel and Greece. Which is a real indication of how dumb it was to try and get Greece and Germany into the same currency.

So a very silly thing done by those Very Serious People who have decided they’d like to rule us.

The Rest…HERE

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