Desmond Lachman is a resident scholar at the American Enterprise Institute, a formidable Think Tank in Washington D.C. He has recently given a lecture espousing the immediate unraveling and collapse of the Euro. Enclosed here are the fine points of his lecture given in Washington D.C.
In January of 1999 the late great Milton Friedman famously warned that the Euro would not survive Europe’s first major economic recession. He based his misgiving on his assessment that Europe was not an optimal currency area like the United States. To Friedman:
- Europe lacked the degree of wage flexibility
- Europe lacked the degree of labor market mobility necessary for a well functioning Monetary Union.
- Europe lacked a system of federal fiscal transfers, whereby federal funds are routinely transferred from stronger states to weaker ones.
- Sadly enough, member states cannot resort to currency devaluation to restore competitiveness.
- Member States have their own Treasury
Aware of the intrinsic structural weaknesses, European Monetary leaders realized that strict budget and public debt limits were fundamental to the euro’s success. Most such leaders recognized that dangers of different inflation rates among member countries. As a result of such, European Monetary leaders established the Stability and Growth Pact to discipline members countries public finances. Mandated was the rule to keep budget deficits below 3% of GDP and to limit public debt to 60% GDP.
The Eurozone lacks the legal and centralized Monetary instrument to keep members compliant to its Pact.
For Lachman and other maco-economic specialists who are watching the Eurozone, they note the immediate future is dismal. Expect painful deflationary and recessionary conditions that will compound their debt problems.
How can member states like Greece succeed?
Given Greece’s inability to increase labor productivity through structural reform, Greece would be better served by restructuring its debt and exiting the Euro now rather than being forced to do so in the after math of a costly IMF austerity program.
At some point, Macro-economists must comply with Milton Friedman’s maxim that ‘their’s no free lunch’! Meaning that absent rising productivity rates and tax decreases, the Eurozone is bound to fail.