The predictable damage of the Euro


The previous post is something I just found in my sent mail folder. I sent it to a discussion mailing list on the 5th of August 2000, and I think it is interesting enough to look at now. I posted it unedited to prevent confusion between what I wrote over a decade ago and my present commentary.

I don’t claim the piece is strikingly insightful: I had, and indeed still have, no formal training in economics, and the post is effectively a somewhat pompous and verbose narration of something really very basic.

To put it in historical context: though Euro notes and coins entered circulation on 1st January 2002,the Euro existed from 1st January 1999, in that the exchange rates of the member national currencies were fixed irrevocably at that point. Gordon Brown had been Chancellor of the Exchequer for three years, in Tony Blair’s first prime ministerial term.

The last paragraph makes a prediction:

Ireland, though independent for decades, only had an independent currency from the 1970s.  Since that time, and with the help of EU subsidies, the Republic has become a modern and prosperous economy. It seems to be at a similar stage in the economic cycle to the UK. However, unlike the UK, the Republic of Ireland joined the Euro. Therefore, at present, where the UK economy is being restrained by relatively high interest rates, Ireland has the same cheap borrowing as the other Euro countries.  This puts them in the same position described for Britain during the Lawson boom.  Building projects are everywhere (remember Loadsamoney?), property prices are spiralling upwards.  Under prevailing economic theories, these are effects of incorrect monetary policy.  However, European monetary policy is not set for Ireland, which is a small economy compared with the stagnating economies of mainland Europe.  The prediction is that within a few years, the Republic of Ireland will face a sudden and traumatic deflation, while any simultaneous change in Britain will start earlier, be more gradual and of less magnitude.

Does that qualify me as a prophet? Not really. “Within a few years” is clearly wrong: the “Great Moderation” meant the economic state in 2000 persisted much longer than I expected it to. Further, there is no prediction of the actual form that “sudden and traumatic deflation” was to take in Ireland: insolvency of first the banks, then the government that had unwisely guaranteed their debt.

The point is not that I am a genius.  The point is that the problems caused by the Euro were extremely predictable. It is always going to be easy to dig through archives and find someone who predicted what would happen, and I’m sure we could find someone who predicted it more accurately than I did. But, since that is always possible, it proves nothing. The fact that I predicted the problems that the Euro would cause (and I remember nothing of actually writing that email) eliminates, at least from my point of view, the statistical error of pulling a single example from an unlimited search space. (If you’ve found this post by googling for Euro predictions, I’m afraid it proves very little).



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