Various experts have been saying that Greece’s problems would be mostly solved if the country had its own currency. The Greek population is just over 11 million, somewhere between that of the Chicago and Los Angeles metropolitan area populations. With its own currency, Greece could devalue its debts and pension obligations in real terms.
If that is true for Greece, why not for U.S. states with similar or larger populations? Just like Greece, U.S. states have big debt obligations and they also run massive budget deficits (though this is mostly in the form of unfunded pension obligations and therefore hidden). If Michigan devalued it would be a more attractive place to invest. Workers could continue to earn their former salaries in “Wolverine Bucks”, but the cost relative to goods and services on the world market would be much less. If California devalued, its state pension obligations would be greatly reduced. The state might owe a 51-year-old retired fire chief $241,000 per year or approximately 2410 barrels of oil, but if the state issued Grizzly Bucks instead, the obligation could be satisfied with just a few hundred barrels of oil.
Conversely, if we think it would not be helpful for a U.S. state with a population of 11 million to have its own currency, why do we think that it would be helpful for Greece?
Don’t states and municipalities effectively create their own currency or securities by issuing bonds? Since bond values fluctuate, there is a connection to the dollar.
Note that the Euro existed for three years before notes and coins began to circulate. What’s virtually in the database is more important than what’s in the mattress, unless it is gold or diamonds during war or other major uncertainty.
This assumes Greece leaving the Eurpean Union. I’m not aware of any State (other than Texas) proposing to leave the Union. It would be disastorous to our economy to have 50 different currencies in the United States.
It’s also unconstitutional:
Article I, Section 10, provides that “No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.
This was not one of your interesting ideas . . .
Allison: I think Greece can leave the euro and stay in the EU. http://www.fco.gov.uk/en/global-issues/european-union/ says that Britain is part of the EU. Yet http://en.wikipedia.org/wiki/United_Kingdom_and_the_euro says that Britain has no plans to adopt the euro.
Here in Illinois, I believe many public pensions have built-in cost of living increases. Wouldn’t paying pensions in “Lincoln Bucks”, and then devaluing those bucks cause the cost of living index to skyrocket, nullifying the whole purpose? I can’t imagine the unions would allow payment via Lincoln Bucks, but increases determined by a dollar-based cost of living index.
Also, I know this is a thought exercise, but isn’t there something in the Constitution that prohibits states from printing currency?
Related: I know the Carolinas were recently talking about allowing commodity metals as legal tender. I guess you would pay for your groceries with silver coins or something like that.
Chuck: If a state had its own currency, the state could have its own consumer price index. Just as the federal government has done, the state could decide what to include in the basket of goods. The state could assume, for example, that nearly all food was from in-state sources (or just remove food, gasoline, etc. from the index altogether!).
Read up on optimal currency areas, which is an area of economic research. Paul Krugman has discussed this in significant detail over the past year or two. It was also a topic of significant discussion before the Euro was implemented, especially by US academics who questioned whether the EU should have a common currency, given the significant differences between the US and the EU.
Briefly there are at least two material differences between the EU and the US:
1) The US population is substantially more culturally homogeneous and more mobile than that of the EU. When the manure hits the fan in one state of the US, citizens of that state are a lot more likely to move to other, more successful states, than are, say, Greeks to move to Germany. Students graduating from college will also tend to take jobs in the successful parts of the US, and so forth. Apart from anything else, there are very few language barriers in the US, and it’s considered entirely normal to pick up and move from one part of the country to the other. Whereas it would be a very big deal if several hundred thousand Greeks were to move to Germany, not least for Germans, many of whom would object vociferously to such a thing, notwithstanding that it’s entirely legal.
2) The US has substantially more internal transfer payments than does the EU. Federal aid to states increases for states that get into trouble in a way that does not happen in the EU. That’s because there’s a strong central govt in the US relative to that in the EU.
US academics noted both of these issues prior to the advent of the euro. It was regarded, at the time, as carping/sour grapes.
It’s a good question. With the continued flow of federal tax dollars from blue states to red states, blue state citizens could be asking themselves who won the civil war. If the US now consisted of two countries, would blue states be enjoying similar standards of living with northern europeans? If the US split into separate currency regimes, would federal experiments bloom or wither?
There is plenty of literature on this. Look up Optimal Currency area. For a start.
http://en.wikipedia.org/wiki/Optimum_currency_area
Main difference is that US is a nation composed of 50 states, which are basically arbitrary divisions to enable distributed governance.
EU is not a nation, but quasi-federation of 27 nations.
While there may be differences between, lets say, Washingtonian and Texan, there is one ‘us’ in USA. In EU, when German says ‘us’, he does not include Greeks in it, and vice-versa.
In US, there is labor market mobility — just few weeks ago, my friends moved to California. Unemployed Greeks cannot just get up and move to Germany for work. Technically, they have right to seek job in other countries, but in practice it is not same — they do not speak language, school system is different, they would not integrate in German society as easily as someone moving to California.
The conventional explanation is that there is much greater mobility of population between US states than between EU countries. So if California stops being able to provide public services, and its infrastructure crumbles, or its state taxes shoot sky high, its people can move to better managed states fairly easily.
In contrast, the number of Greeks who might move to Germany or other more prosperous EU countries is likely to be limited. Even though EU citizens have the right to live and work in any EU state, the linguistic and cultural barriers are a significant barrier to migration.
One potential problem is that labour mobility is much easier in the US than in Greece. Many people would be tempted to move, to avoid being paid in devaluated Grizzly Bucks, making them even more worthless. States could devaluate the pension liabilities, but at some point the lack of fiscal revenue and things like constant prices of raw materials and etc would surely hit the budget.
Perhaps another way to reduce the pensions would be to not issue them in dollars, but in some other index. This index would have a floating value vs. the dollar (or euro), and would be easier to change by governments. People would still complain they’re getting less dollars, but at least governments would not have to go through legal quagmires to reduce the values of pensions.
Jane Jacob’s made a similar in “Cities and the Wealth of Nations”. It’s cities not countries (or states) that are the fundamental units of economic activity. Chicago, for example, with its own neighboring hinterland should have its own currency. Medieval Italy was city-states.
enplaned and RV: Thanks for the optimal currency area links. http://en.wikipedia.org/wiki/Optimum_currency_area#Keynesian is kind of amusing: “Keynesian economists argue that fiscal stimulus in the form of deficit spending may be necessary to fight unemployment, which is not possible if states in a monetary union are not allowed to run sufficient deficits.” The Greeks apparently didn’t get the memo that they weren’t allowed to run big deficits!
(In fairness it should be noted that the Greek government deficit is about 10 percent of GDP. http://www.fms.treas.gov/mts/mts0511.pdf estimates that the U.S. will have a deficit this year of $1.645 trillion, which is about 11 percent of the roughly $14.7 trillion GDP (https://www.cia.gov/library/publications/the-world-factbook/geos/us.html ). So the Greeks are not profligate spenders by U.S. standards.).
[Separately, http://www.chinadaily.com.cn/opinion/2011-06/23/content_12762310.htm is an article I found while Googling for U.S. GDP numbers. The author points out that the decline in GDP in the US/EU can be accounted for by a reduction in investment and notes “In the three years since the financial crisis began, China’s economy has grown by more than 30 percent, while the US has grown by 0.6 percent and the EU has shrunk by 2.1 percent.” I wonder if this is also Greece’s problem. As noted in an earlier posting, if people aren’t sure of future economic and currency arrangements in Greece they will be reluctant to invest.]
Just as the great Depression of 2008 exposed that economists have absolutely no clue what they are talking about, I am appalled at the level of disinformation about Greece.
Greece has two problems:
1) Its economy is in the doldrums, because Greek workers paid in euros are too expensive to be competitive
2) Its government runs too large a deficit, falsified its accounts and concealed the extent of its indebtedness with the collusion of Goldman Sachs, and now is having a hard time getting credit, even at usurious rates, as lenders expect it to default
The Eurozone has three problems:
1) No country in a currency bloc has ever defaulted, and they fear this would wreck the euro and their own economies
2) They fear a domino effect that will take the next PIIGS (Portugal, Ireland, Iceland and Spain)
3) Many German and French banks are among the lenders to the Greek government, and could go bust if it defaults, thus passing on costs to the core Eurozone members’ budgets in the inevitable bailout
Now, in the old days the Greeks could have devalued the drachma, lowering the cost of Greek workers until it was competitive, while giving them the illusion their salaries were not lowered. After a while, the cost of imports like oil would rise, and thus also inflation, which would have the same effect, but it’s all about lowering effective salaries, without the unrest and strikes that would happen if everyone took a mandatory 10% pay cut.
Greece is in the euro, now. Given the current climate, switching back to the drachma has zero chance of success. Everyone would hoard euros, merchants would refuse to accept worthless drachmas, epic hyperinflation would set in, and eventually.
A few years back, another mismanaged country, Zimbabwe, gave up on the Zimbabwean dollar or even any national currency, and made foreign currencies legal tender, thus making the US dollar the de-facto currency of Zimbabwe. The Greek government would find itself in much the same solution, and the euro would become the de-facto currency of Greece, just with the Greek government losing what little influence it has today over the ECB and the Eurozone monetary policy.
Now, for the question of government debt, just because two governments share the same currency does not mean they share the same risk or justify the same interest rates. For all its woes, the US is somewhat better managed than Zimbabwe, which is why the US gets away with minimal interest on its debt, whereas Zimbabwe cannot get credit in any way shape or form, despite the two countries sharing the same currency. It doesn’t have to do with control of the currency either. The Saudi Riyal is pegged to the dollar, i.e. it is basically just a repackaged dollar, but the Saudis had no problem getting loans in the early 1990s when oil was cheap and they had to pay for massive costs due to their burgeoning population and the aftermath of the Gulf War.
My conclusion is that in a purely rational world, Greece’s defaulting should not have any effect on the euro (apart from Greece being expelled from the Eurozone’s decision-making bodies like the ECB), and Greek workers would have to accept painful deflation without the fig leaf of constant nominal wages in a devaluing currency.
Of course, the world we live in, and financial markets, are anything but rational.
“”Various experts have been saying that Greece’s problems would be mostly solved if the country had its own currency.”
Actually in Europe most economists are convinced that this will not solve the issue. Many big European banks (France/Germany) have Greek bonds. What will they be worth after devaluation? The big fear is that will weaken the already weak banks (which will be bailed out with tax payers money).
There is no way to kick Greece out of the EU. So the big mistake was made to let Greece join the Eurozone (which are indeed different countries than the EU) in the first place. Second mistake is that the mechanisms are not strong enough (and governance is weak) to ensure financial stability (let alone that Greece showed fraudelent statistics).
I just wonder why can’t go to Greece for half the cost of going to Germany?
Argentina was able to improve competitivity with devaluation, making their industry stronger. This had a cost (inflation of 10%~20%) but they are leaving the 2001 default, making they payments and therefore getting credit at lower rates.
The US at the Federal level and/or the Fed would never allow it, the seigniorage they make on US Dollars is massive and well worth going to war, even a second civil war, over.
Anyone know a good source of information on flows of tax payments to Feds / largesse from Feds, state by state? I’m interested in how net flows correlate with degree to which popular vote in presidential and congressional elections goes rep v dem.
>>The author points out that the decline in GDP in the US/EU can be accounted for by a reduction in investment and notes “In the three years since the financial crisis began, China’s economy has grown by more than 30 percent, while the US has grown by 0.6 percent and the EU has shrunk by 2.1 percent.”
Here’s an article that throws China’s economy in a new light, as a driver of US and Euro debt:
http://mpettis.com/2011/06/how-to-become-virtuous-and-save-more/
I suggest having a look at “This time is different”. In the beginning of the US there were diverse currencies and it was interesting they all were accepted and one could see what follows if one of the other was devaluated.
http://books.google.com/books/about/This_time_is_different.html?id=ak5fLB24ircC
Don’t worry, the federal government is spending enough that all the states will soon “benefit” from a devalued currency.
Greece has been there in the past – there had been times were people were throwing sacks with money in the river – they had no value anymore. I really don’t get it why people would work to get paid back in money that has no value (for buying stuff from the outside world that is – unless they think they can make self-sustained economies like Albanian tried to and failed miserably)
California came very close to having their own money under Arnold. The were issuing IOU’s, if they had stated these IOU’s were to bearer and could be used to pay for state services (such as taxes owed), then they would have effectively been a state currency.
Greece’s problem is that it cannot print money, as such it can default. Currently it’s 10 year bonds are going for over 16%, compared with with a little over 3% for US (which can only default if it chooses). This means going forward Greeces problems will grow much faster, and it will have to have it’s economy grow that much faster or risk default.
The reason they can’t leave the euro, is that it would cause a meltdown in Greece, with everyone trying to get euro’s before the switch.