Imagining the Citron

Posted: May 24, 2012 in Current Affairs, Economics
Tags: ,

The flaw in the whole Euro project is that it attempted to bring too many apples and oranges together into a single currency and economy.

The wise guys are remarkably inflexible and uncreative about how to solve the problem but it really is (almost) divisible into apples and citrus.  The Euro as we know it is a currency for markets that have climates that can grow apples.  The countries in trouble are mostly places where you can grow citrus (ok, Ireland is an outlier, but stay with me).  These countries need an escape mechanism but can’t inflate their way out of the problem because they don’t own the printing presses.  If they did, like say the UK or the US, they could inflate (moderately) the currency and bring down the GDP to debt ratio.  But there is no comparable citrus-zone-based Euro, let’s call it the Citron, ok?

Divide Europe into Eurozone and Citronzone and you still have most of the advantages of unified currency and enlarged trade zones.  However, the Citron economies would be able to run higher inflation rates letting their debt to GDP ratios equilibrate and stemming the crisis.  A more flexible Citron would make these countries competitive in the global labor market without the crushing austerity that is the real problem right now.  It would reignite demand and trade and end this madness.

Why not?

The benefit of a unified currency market is over rated in a world rushing into an era of plastic money.  There are three currencies in North America and they seem to work well enough.  Europe would have more if you consider the Euro, Citron, Pound, Swiss Franc and a raft of other countries like Iceland and Moldova that have their own currencies.  Splitting the Eurozone would only add one more currency but it would give Germany and important out.

The German constitution prohibits the kind of bond offerings that many say are needed to stem the crisis.  Inventing the Citron would effectively enable Germany to outsource inflation to another currency.  The inflation in the Citron zone would accomplish the desired result of enabling those countries to more easily repay their Euro denominated loans the same way that inflation enables a homebuyer to repay a mortgage with cheaper dollars than those borrowed.

About these ads

So, what did you think?

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s