• Facebook
  • Facebook
  • Facebook
  • Facebook

Search This Blog

Visit our new website.

Friday, January 23, 2009

Riots and euros

As EUObserver reports, EU member states are "intensively" monitoring the risk of spreading civil unrest in Europe, as riots over the economic crisis erupt in Iceland following street clashes in Latvia, Lithuania, Bulgaria and Greece.

It is important to note that, Iceland aside, all of these countries are members of the eurozone or have their currencies pegged to the euro.

The Telegraph's Ambrose Evans-Pritchard, who has been closely following the often unspoken risks existing within the eurozone, made clear in December that Greece's euro membership has led to a warped economy.

He wrote "there is obviously a problem for countries like Greece that were let into EMU for political reasons before their economies had been reformed enough to cope with the rigours of euro life - over the long run," adding that he was "a little surpised that the riot phase of this long politico-economic drama known as EMU has kicked off so soon, and that it has done so first in Greece where the post-bubble hangover has barely begun."

An often overlooked fact is that the other three countries suffering from riots - Bulgaria, Latvia and Lithuania - all have their currencies pegged to the euro.

Warning of this in 2007, economist Stefan Karlsson explained what being pegged to the euro means for non-eurozone members:

"That means that they are forced to have the same interest rates as the ECB sets. And the ECB of course sets interest rates artificially low in a pathetic attempt to revive the lackluster French and Italian economies, which are inhibited by statist domestic policies, as well as to limit the appreciation against the extremely weak U.S. dollar."

The countries now hit by riots need to make painful reforms because of their political commitments, made when joining the EU, to adopt the euro. The commitment to track the euro, in preparation for eventual monetary union, prevents them from devaluing their nominal 'domestic' currencies in order to export out of trouble. Economist Edward Hughes builds a case for doing away with the peg to the euro, allowing these countries to devaluate in order to recover.

Letting countries into a monetary union they are not ready for and forcing countries to peg their currencies to the euro, depriving them of the 'devaluation weapon' - it all contributes to the riots we're witnessing.

Spain and Ireland are clearly not the only ones suffering from monetary union.


Anonymous said...

"Spain and Ireland are clearly not the only ones suffering from monetary union"

Presumably, Britain and Iceland are clearly not the only ones suffering from monetary independence.

Open Europe blog team said...

The difference is though that the mistakes made by Ireland and Spain could not have been avoided even if they wanted to, because they have handed over the competence to raise interest rates (according to some this was the necessary remedy against their bubble) to the ECB.

This in contrast with the UK and Iceland.