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The Antiplanner discusses why the dollar works and the Euro does not . . . 

4/27/2016

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​Why the Dollar Works and the Euro Doesn’t | The Antiplanner

. . . it all goes well till the blog formatting error on page 2. Sigh! 

"The Greek debt crisis led some people to wonder why a common currency works in the United States but not in Europe. Then came the Puerto Rico debt crisis. Yet what happened in Puerto Rico actually shows why the dollar works when the euro doesn’t.

Normally, a country that finds itself with unsustainable debt can devalue its currency. This reduces the standard of living for the country’s residents but makes it easier for the government to pay off whatever debt it owes in the local currency.

Neither Greece nor Puerto Rico have that option since their currency is shared with other nations or states. As a member of the euro zone, Greece can threaten to leave, destabilizing the entire system, unless other members put up with its profligate spending. Greece isn’t the only one: Portugal, Italy, Greece, and Spain–the so-called PIGS–all seem to have unsustainable debts that threaten the euro.

Likewise, Puerto Rico is seeking federal relief (they’re calling it a “rescue,” not a bailout), but it has less leverage than Greece because if it somehow left the dollar zone, no one in the rest of the country would notice. But this isn’t the reason why the dollar works and the euro doesn’t.

At heart, the main reason why the dollar works and the euro doesn’t is that every state has a constitutional requirement that it balance its budget each year. That doesn’t mean that states can’t go into debt–they obviously do whenever they sell bonds–but those debt must be backed by real income from taxes or user fees. In contrast, countries joining the euro all promised to keep their debts under control, but no one enforced the promises and debts of the PIGS went out of control."

There are more things as well, but he is correct generally. The two systems are notably different. The state balanced budget requirement is met in Europe with something similar, budget and debt requirements, however, the European nations in the south found ways around these rules, sometimes simply ignoring them, other times creating complex debt arrangements to skirt the laws. 

Other things like the US welfare, unemployment, and other transfer programs work differently than the European system. The system in Europe would more resemble the US if the US federal government collected only enough taxes to function the government and required the states to collect taxes and pay for pretty much all the actual programs like welfare, defense, roads, etc. Thus, in the US if there is a localized recession in a state, the federal government payments of unemployment insurance, welfare, food stamps, etc. all help to mitigate the poor economy. While in Europe this cannot happen. Greece must tax and pay for all of its internal costs, there are no transfer payments from the federal government.

We can analogize the systems like this: the US is a system where the 50 states are all traveling together but in a vehicle. If one state becomes economically "sick," the federal government through transfer payments cans help nurse it back to health. The economy in the US can continue to move along, since the "sick" state is protected. While in Europe the system is more like each nation is a separate vehicle rigidly connected together by spokes, if one nation becomes economically "sick" it will be dragged along by the other healthier nations, or the entire economy must be slowed to the pace of the "sick" nation. Germany keeps the economy humming, so the "sick" are simply dragged, with parts falling off, slowly being ground to dust.

The south countries were let into the Eurozone because the north had excess manufacturing capacity, and the south had the desire for additional consumption. The dirty little secret was that the north simply looked the other way during the boom times in the 1990s-2000s when the south countries were running up debt. The north liked the fact that the south was buying like mad, and the north didn't mind lending them the money at minuscule interest rates to do so. The wheels fell off the buggy after 2008 as it became clear the debt owed by the south was effectively unrepayable. 

Interestingly, this is a game similar to the one the US played after WWII with the Marshall plan. The difference being the Marshall plan was limited in duration and amount, but designed quickly to return Europe to international trading stature. In essence, the US took the role of the north, the manufacturer, producer, and lender, while Europe took the south position, as debtor, and consumer. The big difference was that the role was limited in time, and within a decade Europe became a manufacturing zone with brand new mills, and factories. This never happened in the European south, they only wanted to be consumers. The biggest difference is that Europe under the Marshall plan became a productive producer zone, while the European south only became a consumer region, the money was not used to create valuable productive assets, but only to consume. This has relegated the south to the status of welfare debt slavery.

I am not sure what happened on page two of the Antiplanner blog, I will try to update once he corrects the problem.
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