Monday, May 17, 2010

Anti Euro-silliness

It's become fashionable lately to talk about how the Euro was a mistake, since having Euro-zone countries pegged to the same currency doesn't allow for imbalances to be resolved by changes in exchange rates.

Sure, in an ideal world, this could work, but in the real world, there's nothing stopping people and companies from getting loans or borrowing money in whatever currency they feel like. If Germany had kept their interest rates extremely low, most likely borrowers in the rest of Europe would have started taking out their mortgages in German Marks.

It would be impossible to devalue the currency at that point without bankrupting half the population. To make things worse, in a crisis situation, a relatively small economy like Spain would be unable to defend its currency and would most likely fall to currency speculation, causing an enormous amount of collateral damage.

No comments: