| http://www.ireland.com/newspaper/finance/2001/0905/fin18.htm
Wednesday, September 5, 2001 US economist expounds on great euro mistake ON WALL STREET/Conor O'Clery The launch of the euro coinage last week brought yet another warning from Prof Milton Friedman that the whole thing is a great mistake. America's best-known economist cited Ireland to make his case in an Italian newspaper. Here was a state, he said, which should be tightening its monetary policy, but couldn't, because it was tied into the new European currency. I called the 85-year-old Nobel Laureate at his home in California and asked him to expand on this. "Ireland is an interesting case with respect to the euro," he said. "It cannot have a separate monetary policy. The European Central Bank makes monetary policy for the whole of euroland. The interesting thing about Ireland is that it has been growing much more rapidly than the rest of euroland and that has given it a balance of payments surplus and it has also caused a rise in prices, so that so far the euro has brought inflation to Ireland. "Within the euro that balance of payments surplus means that you are taking in more euros than you are paying out, and that means that the money supply in Ireland is growing much more rapidly than the money supply in the euro as a whole." So what would the correct monetary policy for Ireland be? "Stable prices - the general recipe which has been most successful in most other countries," he replied. "The first example I guess is New Zealand which targets inflation at about 2 per cent to allow for the deficiencies in the index." If Ireland had an independent monetary policy "the Irish punt would have appreciated relative to other currencies", continued Prof Friedman, who maintains that rough price stability in the euro as a whole has meant 15-20 per cent inflation in consumer prices in Ireland, and that stable prices in the Republic would have required a 15-20 per cent appreciation of the punt versus the euro. "The balance of payment surpluses would have been matched by either importing physical goods or by making foreign investments, but because of the connection with the euro, your balance of payments surplus has not been used to add to the stock of physical goods, it's been used to add to the stock of money," he stated. This is not the first time the euro has come under attack from the libertarian economist who inspired Margaret Thatcher and who in the 1950s predicted the breakdown of the post-war Bretton Woods system of fixed exchange rates. He has been engaged in a public debate with Dr Robert Mundell, the Canadian economist and Nobel Prize winner who is known as the "godfather" of the euro for his theories on monetary zones. Dr Mundell (69) advocates a global economy under one world currency, and rejects Mr Friedman's contention that individual countries need flexible exchange rates to absorb the shocks of economic change. The exchange rate is not a real economic cushion against economic shocks such as a rise in the price of oil, maintains Dr Mundell. In his opinion countries will ultimately see the benefits of adopting internal market-based reforms under a fixed currency regime, while Prof Friedman maintains that internal politics inhibit individual countries from adopting proper market-based reforms, necessitating flexible exchange rates. As time went by, Prof Friedman told me, there would be serious differences in the EU over the policies the European Central Bank should follow. "You know, it's an ironic thing in a way," he said, "the euro was adopted really for political purposes, not economic purposes, as a step toward the myth of the United States of Europe. In fact I believe its effect will be exactly the opposite." The need for different policies, like tightening monetary policy in Ireland or a more flexible monetary policy in Italy, "will produce political tensions that will make it more difficult to get political unity". The euro had no historical precedent, Prof Friedman emphasised. Never before had there been a multi-nation money. Gold served as a pseudo world currency in the 19th and early 20th centuries but "the gold standard wasn't the same thing because each country separately had the ability to break with the gold standard and set its currency free, or change its par, devalue or appreciate it", he said. But now Ireland was stuck with the euro. "How would you break out, and start all over again to establish a new monetary system, the punt? You are not going to give it up. You have locked yourselves together and thrown away the key." As to the obvious question, given the political debate in Britain, should the UK stay out of the euro? "Absolutely," replied the economist, who likes to paraphrase Clemenceau's famous remark about war, saying that money is much too serious a matter to be left to central bankers. |
