The Economics of Euro-Enthusiasm

Economists, including myself, have a fondness for rational arguments. We are tempted to do (or prescribe) whatever we derive from our crystal-clear principles on how reality works, or at least how it should be working. That’s why economic theorists sometimes approach the natural complexity of things as a pesky problem – or simply neglect it. Though I don’t remember the exact quotation, I think it was American Nobel laureate Robert Lucas who said a good economic model should be simple enough to be written on a napkin. However, I strongly believe that when it comes down to the lives of real people, sheer logic isn’t always the most fruitful approach.

That’s why I take rational arguments against the euro with a grain of salt. Anti-euro diatribes are becoming increasingly fashionable these days. Distinguished economists argue that global market players consider Europe’s most-advanced marketplaces risky because they lack currencies of their own,  while columnists say the euro has failed to fulfill its creators’ expectations. These arguments contain a disturbing degree of truth. For example, it is true that the euro has imposed grave inflexibilities on Europe’s economies,  and the costs are vast.

But did the people who established the common currency not foresee this? If not, why have they poured vast amounts of money into structural and cohesion funds in recent years?

There has to be a reason for the euro beyond merely political ones. Euro enthusiasts argue that the euro is not principally a tool of economic policy, but a symbol of European integration – a new European currency for Europe’s new citizenry.  Since the rationale for the common currency is purely political, economic arguments against it are futile, they say.

But economists don’t like to sweep rational arguments off the table by stating that an issue is politically motivated. What is good must be taken into account on a case-by-case basis. The baseline equation needs to be amended with new coefficients.

We should think of the euro as an apartment with different roommates. When times are bad, the inhabitants tend to forget the advantages of having a common place to live. Yet the fact that epidemics spread faster in large cities doesn’t encourage masses of people to rush to the countryside. They prefer proper public healthcare, which can only be achieved through joint cooperation. They prefer to stay where they belong – that is, together.

The project of unifying Europe was a political decision that can be priced economically. Axing barriers to trade paves the way for peace and prosperity, while tightening political ties between member states ensures that those nasty barriers won’t grow back again. Costs fall and prices are kept low. Small nations find shelter and a stabilizing anchor in the common market (as Montenegrins did back in the 1990s when we introduced the Deutsche mark). Europeans are experiencing a tremendous, previously unknown sense of liberty because their currency is accepted all over the entire continent. This experience itself contributes to their wellbeing.

At the same time, euro helps us better realize the reforms we need to  improve our competitiveness. These decisions are not easy, but inevitable. Economic experts agree that the euro helped Montenegro achieve stabilityand low inflation, and the country has become more attractive and safer for foreign investment.  I completely agree with Zdeněk Sychrawho , a European studies expert at Masaryk University who said, “ The fact that we use the euro doesn’t mean that we will not have to fulfil all the requirements to enter the euro zone”.

The benefits become even more conspicuous when we consider the fact that there has been no armed conflict upon European soil for the last decades – except for the one that all of us regret so deeply. A common economic purpose reduces the chance of conflict – and the tighter we knit Europe’s economic fabric, the less likely conflicts are to occur. The common currency embodies the process of unifying of Europe’s economies. Abolish the symbol, and the rest will evaporate sooner or later.

This is the true opportunity cost of the billions that have been spent on rescuing the common currency. It is harder to measure, yet it undoubtedly exists.

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10 Responses to The Economics of Euro-Enthusiasm

  1. Noxy says:

    Nice phreasology from hart of black mountines.

  2. William Taylor says:

    hi igor, it is a pleasent surprise that I can read a real finance minister’s blog at WordPress. Congratulations to you and well done to WP, which seems to become a centre of thoughts in social media.
    I would love to share your enthusiasm for the euro but I cannot. I fully agree that the creation and existence of the euro was and is mostly a political issue. Nevertheless the crisis of the euro was also caused by irresponsible politicians in Greece, Spain, Italy and all over the EU. If the euro falls the integration process will halt or even turn back. So I would say that while great statemen created the euro, unfortunately their crony successors, stupid, short-sighted politicians are likely to destroy it.
    Good luck to your blog, I promise to follow you:-)

    • igorluksic says:

      Hi William, I don’t think that only politicians should be blamed for the current issues, either. I also don’t see see the future in such a gloomy light: Europe has always overcome the crises of the past decades . We hope this time won’t be any different – and we are working to make sure it’s not.

  3. Thunderbird says:

    I think the disadvantages of the euro will be more visible if Montenegro really joins the EU and the eurozone. Montenegro’s turn from Deutsche Mark to euro turned out to be a good idea, and i think the advantages of euro for montenegro clearly exceed itts disadvantages. But when you, as a Eurozone member (I say it fronm Germany) has to pay the cost of the fiscal irresponsibility of other nations’ politicians, it’s really embarrassing. But I agree that it is a political project as well, and the political role of euro and EU as extremely important- we haven’t seen any wars between EU members in the last 50 years.

    • igorluksic says:

      Well, while I understand your feelings as a German, I think you have to see the whole interconnectedness of the situation. Germany, and especially German industry clearly gained a lot from the Eurozone. And bailing out these countries is your self-interest too, since Western banks hold most of the private and public bonds from the troubled nations.

  4. markot says:

    Greetings Professor Luksic ,
    The article was very interesting and quite useful , i enjoyed reading it . I would very much appreciate to hear your opinion on common PIGS problem ,and Euro /Dolar (EUR/USD) exchange rates ? From decembar last year – till today ,Euro is downtranding . Decembar price was : 1.5200 , today : 1.2000 , which is about 20% loss in value for just 6 month !

    Thank you !

  5. zuborko says:

    “When it comes down to the lives of real people, sheer logic isn’t always the most fruitful approach” is pretty understandable from the point of view of those “real people”, whatever the heck you mention under that scary phrase. Aren’t all people real? As far as I know, they are – each human being has his/her senses, hopes, feelings, actions and interactions with rest of the world. Though, for you it seems to be unpleasant fact, for you people need to be only pawns on your chess table, so you can play with them in your spare time, making people just the numbers in your reports and experimental support for your theories, nothing more.

    • igorluksic says:

      Dear Zuborko, Macroeconomics deals with aggregate problems, which is what I referred to. But forgetting the micro-side of the story (what i call the problems of “real people”) is not macroeconomics, it’s bad economics.

  6. John Do says:

    Just peace of paper like every other currency, but we will realize only at the beginning of the end.

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