02 November 2011
The Eurosceptics were right about the Euro but for the wrong reasons

In the days when I was more involved with euro-scepticism than I am today (we’re talking about the time of Maastricht, here) I was always rather puzzled by the arguments being put forward by my comrades about the Euro.  They would complain that Europe was not an “optimal currency area” and that it would lead to a “one-size-fits-all” monetary policy.

And now I realise why I was so puzzled.  They were wrong.

My argument against the Euro (should you be interested) was that freedom had a better chance outside a European federation than inside and so anything coming from the EU was likely to be a bad thing.

Anyway, the crisis that the Euro currently faces has nothing to do with “optimal currrency areas” (which I do not believe exist) and nothing to do with interest rates (at least not the sort set by central banks).

No, this crisis has one very simple cause: Greece (and others) borrowed too much.  Actually, even that isn’t the crisis.  The crisis is that other countries in Europe are worried that if Greece were to go bust their too-big-to-fail banks would indeed fail and disaster would ensue.  Others of us, of course, think that trying to prevent this from happening will lead to an even greater disaster but that is by the by.

Now, getting back to the crisis, you’ll notice that none of this has anything to do with the Euro.

Well, kinda. There is the little matter of the Maastricht criteria.  These were the levels of debt, deficit and inflation that all members of the Eurozone were supposed to meet.  And after a state had received the EU’s imprimatur, it was not unreasonable for banks to think that they (the states) were a good credit risk.

So, there’s sort of an implicit guarantee here although frankly I would be inclined to remind the banks that they are ultimately responsible for assessing the credit worthiness of the people they are lending to and if they lend too much to such sub-prime borrowers then it’s their funeral.

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