• Mathieu Provencher

Visible vs. Invisible transfers

(picture taken from Wix's library)

Hi Guys! With all these talks about Brexit and Grexit... is this the beginning of the end for the Euro?

First, the Euro Zone and the European Union (EU) are different things. The United Kingdom is potentially considering leaving the EU while Greece may leave the Euro (by itself or not).

If Brexis (Great Britain leaving the EU) happens, this should not have any significant impact on the survival of the Euro in the long run. If Grexit (Greece leaving the Euro but not necessarily the EU) happens, it looks like the Euro will do fine without.

The greatest risk I see for the Euro relates to what has been dubbed the "two speed Euro". If the richest countries decide to create a Euro+ currency while the poorer countries are forced to use a Euro- currency, that would probably lead to the eventual breaking down of the Euro Zone.

I don't foresee that as a likely possibility but who knows when it comes to politicians... I personally think that the Euro Zone should have been dismantled a while ago (for economic reasons) anyways.

Let me explain a bit more why I think that the Euro should have gone down a while ago.

Very bright economist, such as Joseph Stiglitz (nobel price winner by the way) for example, often compare the Euro Zone to the different states of the USA. They argue that if the USA can do it (have all these regional governments under the same currency, the US Dollar), so can the many countries of Europe (the ones in the monetary union). However, the Euro Zone is a monetary union without a fiscal union. Having the same currency is not a problem by itself if the different partners (provinces or countries) are relatively similar. They would all benefit or be hindered in the same way when the currency gains or looses value. If the partners are substantially different, then having fiscal transfers between them could compensate those that loose by taking some of the gains of the others (somewhat of a Pareto Optimal Redistribution scheme). The Euro Zone cannot do that efficiently. It is very difficult to sustain fiscal transfers without creating the impression that Germany is constantly helping Greece (in the latest crisis). This comes from the problem of visible fiscal transfer to pay for invisible monetary gains. Germany is clearly winning by having Greece in its monetary union (for example because of a weaker currency and lower transaction costs) but this is an invisible transfer. There are no clear (official) transfer of funds from Greece to Germany for this (for example). At the same time, Germany sending money to "help" the Greek economy in times of difficulties, related significantly to the monetary union (Greece has a currency that is much stronger than it would normally have). This is a clearly visible transfer that makes German voters feel that they are wasting their money in helping weaker economies.

#EU #Europe #EuroZone #Grexit #Brexit #VisibleTransfers #InvisibleTransfers