Print More Euros
By Arnold Kling
There are real issues with the euro; its member states are far from an optimal currency zone, and the problem will only get worse as more members are added (if they are; the proposed new members are getting a little twitchy). America has all sorts of ways to mitigate the damage done by its own sub-optimal currency union; Europe has been slow to develop such mechanisms, especially fiscal stabilisers and labour market mobility. It is not hard to envision a scenario where long-term economic stagnation in the countries that used to depend on a cheap currency to support their manufacturing base results in a new government committed to exit
If Europe is not an optimum currency area, then the problem is in some sense that equilibrium wage rates in euros differ across countries. What is needed is for wages in, say, Italy, to fall and wages somewhere else to rise. But inflation rates are low and wages tend to be sticky downward.
So the solution would seem to be to print more euros and boost the inflation rate. This would provide a cover for a relative wage shift, as the wages in other countries rise more than those of Italian workers.
I’m not saying they should crank up the printing presses to the point of double-digit inflation. But, assuming that my admittedly Keynesian analysis is correct, the imbalance problems caused by the euro seem solvable with more money growth. Right?
My main point is that I think that compared to Europe’s regulatory and cultural problems, whatever issues that the euro creates are relatively minor. My prediction is that if a country secedes from the euro but does not fix its institutional problems, it will achieve little.