Bet on Euro: I Won
By David Henderson
Back in October 2011, I had a bet on the Euro with Iain Murray of the Competitive Enterprise Institute. To recall, he bet that by the end of March 2013, Spain, Italy, and Greece would have left the Euro. I found his reasoning sound but his timing off.
First, his reasoning, or, more exactly, my reasoning about why his thinking made sense. An economics literature beginning in about the 1960s found that there was a case for what economists call an “optimal currency area.” Here’s the Concise Encyclopedia article on that subject, written by Paul Bergin. Two key paragraphs:
Much of the theory of optimal currency areas is illustrated by the institutions of the U.S. economy, which might be viewed a type of monetary union in which fifty states have agreed to share a common currency. Although the severity of recessions in the United States can vary by region, there is significant labor mobility, with around 3 percent of the U.S. population moving from one state to another annually. Further, the federal fiscal system permits compensation across state lines. Economists have estimated that for every dollar lost in one region relative to another in a recent recession, up to thirty-five cents were transferred to the losing region from the rest of the country, in terms of lower income taxes paid to the federal government and extra unemployment benefits received.
By contrast, there is relatively little labor mobility between European countries. Only about 1 percent of Germans and Italians relocate annually between regions within their own countries, and even fewer move between the two countries. As yet, most taxes and fiscal expenditures are conducted at the national level, and so there is limited opportunity for cross-country compensation. Further, European countries have more distinct business cycles than those observed between U.S. regions.
This gets at why I thought the Euro never made much sense. I’m guessing that Iain Murray’s reasoning was similar.
For that reason, I would not be surprised if any of these countries were to leave the Euro but I thought that Iain was assuming it would happen way sooner than it did. As I noted in my post announcing this bet:
I remember Milton Friedman saying that when he looked back at his predictions, he had almost always been right about the direction and almost always wrong about the timing. He had always predicted that changes would happen more quickly than they did. That’s what I think Iain did. It’s what I did back in 2001 when I bet an official from Austria’s central bank that at least one country would have left the Euro by 2006.
Iain Murray, an honorable man, paid up, and told me had no problem with my announcing the outcome.