everybody interested in the situation in Greece should head over to Crooked Timber and read dsquared choose your own adventure game: what would you do for Greece?

” But for most of the 2000s, the ECB followed a very loose monetary policy of low interest rates, which benefited the north European countries like Germany and France at the expense of Greece, Spain, and Portugal. ”

I have often read and heard this asserted without any evidence offered. The data does not support the assertion that the ECB was following a loose monetary policy. Anyway, nominal interest rates are a useless metric to measure the looseness or tightness of monetary policy.

One thing that we would expect to see if the ECB had been following a loose monetary policy is the currency would have depreciated. The euro was indeed weak in the early days of the euro. However, since 2002 the euro appreciated vis-a-vis the USD, which could of course have been USD weakness. However, the euro real effective exchange rate (REER) which is the trade-weighted exchange rate also appreciated. See historical charts here.
http://www.euroeconomics.eu.com/financial_markets.htm

If the ECB had been following a loose monetary policy we would also expect to see high EZ NGDP growth. Some parts of the EZ did indeed have high NGDP growth. However, we are looking at the notional EZ economy for which the one-size-fits-all monetary policy is supposed to be set and not some pats of it. No evidence of high EZ-wide NGDP growth.

The German unemployment rate does not support the assertion that ECB policy was favouring them in the noughties. German unemployment rose for the first half of the decade and peaked at 12% in 2005. Unemployment was still over 10% in 2007, it declined when their labour market reforms kicked in. Yes, part of those reforms were screwing the workers through repressing wages. However, monetary policy did not just suddenly start working in Germany around 2007. Sure, European incompetence is currently helping Germany, but that is a different story.
http://www.tradingeconomics.com/germany/unemployment-rate

There is no doubt that monetary policy was too loose for some pats of the EZ periphery, but that is different to saying that Monetary policy was too loose for the EZ. What you are identifying is that a one-size-fits-all monetary policy does not work for a monetary union as diverse as the EZ. No monetary policy could have worked because the EZ does not work.

@2 – That’s actually the point I was trying to make, apparently I wasn’t clear; how the ‘loose’ the monetary policy was is obviously a relative calculation. I’d be happy to qualify that by saying the monetary policy might not be loose overall, the real item of interest is it was too loose for Greece. I’d also come to the same conclusion RE the Euro.

Don’t the number of times (3?) that Germany has defaulted on debt to get itself out of a hole.

>But German industrial policy has been to hold down wages and undercut labour remuneration and costs compared to other European countries to make its capital more competitive:

That’s a tough one to argue when Germany has some of the highest salaries in Europe.

Germany got on with sorting the problems out; the rest didn’t.

RE: German wages

http://www.social-europe.eu/2011/12/following-germanys-lead-to-economic-disaster/

When you look at employee renumeration rather than unit labour cost the picture is actually even more bleak – German wages declined by 4% over the last 10 years.

I didn’t provide a hyperlink as a source on ‘Greece is being pillaged’

Paul Mason’s report is worth a read. I’m looking forward to the Newsnight film this evening…

http://www.bbc.co.uk/news/business-17067104

” were all the countries to collectively agree to raise workers’ living standards at the same rate, everyone would be better off.”

In this scenario, the value of money just inflates off. But all countries of the world do not raise their costs at the same rate. If everyone in EU does this – which is what you seem to propose – then, if you raise the workers’ wages faster than their productivity raises, the end result is an uncompetitive Europe. Not a good thing.

It’s not the fault of Germany, overall, that Greece has taken more and more borrowed money to pay for its loans. It’s the fault of those who wanted Greek government spend more than it can afford. It’s the fault of those whose have benefited from the hugely regulated, sclerotic economic system that Greece has.

Of course, the whole idea that the rest of EU bails out Greece is needed to protect the interests of German and French banks. This is why we’ve been pouring money into Greece, although it has been absolutely clear for everyone to see that Greece is going to default, and it will have to leave the euro.

The potential flaws of European monetary union were analysed in articles for the US periodical Foreign Affairs in the late 1990s:

Rudi Dornbusch: Euro fantasies (Foreign Affairs 1996) – steep subscription barrier but see too the late Dornbusch’s popular, mainstream student text: Macroeconomics (McGraw Hill)

Marty Feldstein: EMU and international conflict (Foreign Affairs, 1997), reposted to NBER website:

To most Americans, European economic and monetary union seems like an obscure financial undertaking of no relevance to the United States. That perception is far from correct. If EMU does come into existence, as now seems increasingly likely, it will change the political character of Europe in ways that could lead to conflicts in Europe and confrontations with the United States.
http://www.nber.org/feldstein/fa1197.html

Jacques Delors was quoted in the Telegraph in December:

Jacques Delors interview: Euro would still be strong if it had been built to my plan
Former president of the European Commission Jacques Delors talks to Charles Moore about the fate of the euro.

Its worth pointing out that Banks are relatively small holders of Greek debt now. Except in Greece where they still hold loads of it. Pension funds have a lot, but the main holder now of Greek debt is the ECB. Which is why there is such a problem if Greece defaults.

Re:wages

Productivity is they key here. What hat chart could equally well be showng us is how German workers increased their producivity whilst other countried didn’t

That Crooked Timber CYOA game is great, by the way

“If Greece had its own currency, it would at this point likely devalue it to make its exports cheaper, shrinking its trade deficit and kick-starting GDP growth.”

Oh please. Not this again.

This article gives you, on a plate, the best argument for joining the euro as soon as possible. Economic thinking in Britain is dominated by people who think that devaluation is the answer to all our economic woes.

It’s been tried, tried and tried again. It has never worked. Every few years the government chops a bit off the value of everything we all earn or own and take it for granted that no-one will notice. (remember Harold Wilson and his ‘pound in your pocket’ – not true then. Not true now). Our relative economic decline goes on.

The only argument for saving the pound (and imposing massive costs on all of us, every time we want to trade or travel as well as making us the last place in Europe anyone from outside wants to invest) is this idea that we can keep devaluing it. It means the financial markets know that sterling is a one way bet. British governments will always devalue it.

Devaluation doesn’t work. It’s never worked.

@11: “Devaluation doesn’t work. It’s never worked.”

So then let’s get back to the old Gold Standard or to the post-1944 Bretton Woods system of fixed exchange rates with an adjustable peg.

C’mon. Why do you suppose those systems broke down? The US Dollar floats against the Euro and the UK Pound floats against both. The Euro has gone from aound 67 pence in 2007, before the run on Northern Rock, to around 83 pence, now, a depreciation of about 24 pc.
http://www.oanda.com/currency/historical-rates/

The result:

“The UK’s trade deficit is the smallest it has been since 2003 and industrial output has recovered by more than was originally forecast, according to figures from the Office for National Statistics (ONS). The signs for the economy were said to be ‘encouraging’.”

If devaluation doesn’t work then exchange appreciation won’t work either. In which case, why are the Americans complaining that China is keeping the price of the Renminbi artificially low?

Btw the figures for Unit Labour Costs presented in the thread header convey a misleading impression that diverging trends in unit labour costs between countries are the only reason for diverging trends in competitiveness and that is not so. A country’s current account may deteriorate – or improve – for other reasons, such as falling/increasing prices for its exportables. In the early 1980s, the Pound appreciated in the forex markets as it became a petro currency because of North Sea Oil exports.

@12

Yeah right. The highest unemployment since the early 90s is ‘encouraging’

Chris you did not answer the questions put to you…

Does it matter? At the end of the day, apart from the chattering classes on the Left, does it really matter? A couple of weeks ago we had a Typical five reasons the Labour/Left cannot gain something or other. All the usual whinges were there, media bias, lack of visible support and of course the dual killer ‘Nobody is listening to us, and we talk to ourselves’. So while millions of people are under the cosh, facing unemployment, the Left seem obsessed with freedom of Information and the ‘Euro’ illustrated by graphs. Very important subjects, but not on the top of the agenda for people facing the dole.

When you chip up something that gets to the heart of the matter, People listen to us. Tesco exploiting the unemployed and we see nearly 500 tweets. What that means in the wider scheme of things, I have no idea, but we never see 500 tweets on anything else.

People listen to us when we have something to say that gets right into their personal experiences. If you have recently become unemployed the thought that you could be forced to supply your labour free of charge to a multinational, you listen to people who think that might be, well, potentially, slightly wrong, if we have the facts right, but not making any promises of course. The Right exploit people’s fears, be it hate preachers, criminal gangs, unemployed scroungers and a list as long as your arm. The Left are more interested in each other’s pet theories about some esoteric policy shuffling or other.

While the Right paint a picture of broken Britain regarding a large family or a preacher that wants dead squaddies, the Left are too busy forming human centipedes in the hope someone will excrete something important.

Football teams make their own luck. Sure, an opposition goalie can fluff a back pass or defender can be caught napping at a throw in, but you need players exploiting that. Take a poor corner at Old Trafford and Wayne Rooney will be slamming the ball in the back of the net at the other end in five passes.

I am old enough to remember Edwina Currie was a spectator sport in her own right. In fact, spitting image and Week Ending, and others wouldn’t have a show without her. Every week she paused only to swap feet. This week she made something of a comeback:

http://www.dailymail.co.uk/news/article-2102478/You-try-raising-family-1-000-month-Edwina-Mother-challenges-ex-MP-clash-national-radio-family-finances.html

The Tories have been seen to be out of touch with normal people. Here we see a shrill hectoring Tory lording over someone who had found herself struggling and yet the Left are nowhere. Millions of people in her situation are looking for a way out of their predicament and the Left are silent. Currie, dropped the ball onto her own penalty spot walked to the sidelines and the Left are at the halfway line, discussing the merits of FOI requests.

Remember the Diane Abbott thing around the new year? Yes of course you do, because the Right were all over it.

So who was it that got up and ran with this story? Christ, when we are outflanked on the Left by the Mail we have serious problems. The millionaires’ Party are seen shitting onto the poor and the ‘best’ we can come up with is a piece on FOI requests. Why? Who the fuck gives a shit one way or another?

I don’t know if that couple are dyed in the wool Tories, Labour, Lib Dems or floating voters who thought they would give the Tories a chance, but don’t be surprised to find that working part time causes them more problems than whether or not German policy has sparked a Euro crisis. So, they may or may not be looking for a party or an ideology who offers an alternative, but they needn’t look at the Left, not unless they bring a surgical needle and thread and join the back of the centipede. We are more interested in looking a Mitt Romey’s opinion on Lunar Stations, than a semi unemployed family and their dog’s dinner.

Does anyone know what Edwina Currie’s views on FOI requests are? If she makes a gaffe, perhaps we can use it to embarrass Cameron.

@13: “Yeah right. The highest unemployment since the early 90s is ‘encouraging’”

C’mon. It doesn’t follow that the current and deteriorating unemployment rate is because of the depreciation of the Pound by c. 24 pc between 2007 and 2012.

What do you suppose Britain’s unemployment rate would be if the depreciation of the Pound had not boosted net exports?

Of course, currency depreciation doesn’t ensure net exports will necessarily improve. The necessary elasticity conditions and the absorption conditions favourable to devaluation have to be met and workers have to accept the increase in import prices without starting a wage-price inflationary spiral.

International economics can be tricky for the unwary. Try Krugman + Obsfeld: International Economics

Note this inescapable policy “trilemma”:

“policy makers in open economies face a macroeconomic trilemma. Typically they are confronted with three typically desirable, yet contradictory objectives:

(1) to stabilize the exchange rate;
(2) to enjoy free international capital mobility;
(3) to engage in monetary policy orientated towards domestic goals [such as flexing interest rates to curb national inflation].

Because only two out of the three objectives can be mutually consistent, policymakers must decide which one to give up. This is the trilemma.”
http://elsa.berkeley.edu/~obstfeld/ost12.pdf

Jim: “Does it matter? At the end of the day, apart from the chattering classes on the Left, does it really matter?”

Yes, it does, very much so.

The endlessly repeated orthodoxy in the EZ is that current EZ problems are all due to fiscal indiscipline when they are not. Without the correct diagnosis of the issues, we won’t get the appropriate remedial policies.

EMU did not meet the essential conditions for a stable optimum currency union. For starters, only Luxembourg met the eligibility criteria set out in the Maastricht Treaty. A monetary union means that all participating countries have to live with the same interest rates set by the central bank of the union regardless of whether those rates suit national conditions to curb inflation – and asset-price bubbles. In short, the economies have to be sufficiently similar to be able to tolerate the same interest rates without instability. In fact, inflation rates within EZ economies diverged.

What happens if the competitiveness of national economies diverge for any of several reasons – diverging unit labour costs, rising/falling world prices for the exportable or importables of some countries in the monetary union or changing consumer preferences for traded products? Monetary unions without fiscal unions are potentially unstable – in Britain, only London and the South East regions are net contributors to the national exchequer; there is no corresponding system in the EU for countries with chronic trade surpluses to transfer funds to chronic trade deficit countries when trade deficits have a depressing effect on national economies so national governments use fiscal means to compensate for that.

Cameron’s recent speech at the Davos conference provides a better skate over relevant issues that the mindless repetition of the EZ dogma that all EZ problems are due to fiscal indiscipline:
http://www.politics.co.uk/comment-analysis/2012/01/26/david-cameron-s-davos-speech-in-full

Btw in case no one has noticed, I’m not a regular fan of Cameron.

“Devaluation doesn’t work. It’s never worked.”

for what?

if you are talking about a country with a balance of payments crisis, external debt crisis and such like, what the hell else is there except devaluation? How on earth would Argentina, Iceland you name it have recovered without devaluation?

although there is one often overlooked difference between Greece and these other countries – Greece really lacks export industries (except tourism) and isn’t remotely self sufficient in food, making devaluation less effective. This is something those who advocate default and Euro exit need to give some more thought to.

@17 Bob B – Well said. Something that was edited out of the original article http://theredrock.wordpress.com/2012/02/17/five-reasons-germany-isnt-innocent-in-the-euro-crisis/ by Sunny (for good reasons, it was a bit long for LibCon) actually drives this home – Spain, famously one of the PIIGS, actually kept the deficit targets on the European Stability and Growth Pact until 2008 – compared to Germany’s 2003.

It then kept the debt target until 2010, which is fairly incredible. Now that’s fiscal discipline…

11. Chris

” This article gives you, on a plate, the best argument for joining the euro as soon as possible. ”

Oh dear, the last diehard in Britain who thinks that the euro was a good idea. Devaluation often is the correct thing to do and nearly always works because the former external value was the incorrect price. Why on earth could it be the right thing to do to trade with a currency at the wrong price and obviously wrong from your point of view to have the currency at the correct price.

If Germany left the euro their currency would appreciate by around 20% i.e. the current euro is 20% undervalued for the German economy. Not difficult to sell a lot of exports 20% undervalued. Greece if they left would experience their currency depreciating by around 50% i.e. financial markets would be saying this is what your currency is really worth and not the old price that Chris was saying was the correct price.

Of course, in the long-term the external value of the currency makes absolutely no difference either way to real variables. Money, after all, is long-run neutral and a 50% depreciation will not change Greek real variables in the long-run. However, in the short-run money is not neutral and will boost the economy because the former price was the wrong price. To believe otherwise is like saying if Tesco reduced their bananas from £1 to 50p, they would not sell anymore bananas.

” The only argument for saving the pound (and imposing massive costs on all of us, every time we want to trade or travel as well as making us the last place in Europe anyone from outside wants to invest…”

No 1 for foreign investment I believe. Perhaps you would like to explain why you feel travelers etc have the right to travel with an overvalued currency, while the overvaluation imposes costs on everyone else? When the UK exited the ERM and suffered a devaluation. The only thing that happened was the exchange was moving from the wrong price set by politicians and their lackeys to the correct price set by the market. Mr Market knew the price set by politicians and their lackeys was the wrong price because he is cleverer and has more information than them. A one way bet because reality always beats wishful thinking.

” Devaluation doesn’t work. It’s never worked. ”

Devaluation always works if the price was wrong. The key thing is not to have an undervalued currency or an overvalued currency, but a correctly valued currency. Fixing the price will always eventually be the wrong price. Therefore, the correct exchange rate policy is benign neglect. Float the currency and forget about it and let financial markets determine the price based on supply and demand to hold that currency. The euro freely floats. However, even though the value of the euro exchange rate may be determined by the market for the EZ economy, if there is such a thing. As we can see from the resulting train wreck, it is the wrong price for the constituent parts of the EZ. Too low for Germany, and too high for Greece. A mess brought to you by people who think they know best, they don’t and it was arrogant folly for them to believe that they did.

I was often engaged in international online forums c. 2000 saying then that joining the Euro wasn’t a good idea.

The important insight in retrospect is that any who took that line at the time were instantly dubbed “loony” or “insane” – I was, as were others. Rational debate became impossible. It was an illuminating case of unbridled enthusiasm for European monetary union trumping all rational analysis of the issues. In a piece in the FT last year, John Major reminded us that in the EZ negotiations about Greece joining, the decisive argument from the French government at that time was: You can’t say No to the country of Plato.

When that is the quality of political debate among political leaders, there is little hope of getting rational, robust economic policy. They simply don’t know what they are doing.

Recap that c. 2000, John Monks, as general secretary of the TUC, was going round saying how home owners buying their houses on mortgages would benefit from the lower interest rates prevailing in the Eurozone. Consider what would have happened to Britain’s house-price bubble if we had had the benefit of those lower interest rates in the EZ. In the news today:

Average house prices have risen in just two local authority areas since the UK’s property boom peaked in 2007, research suggests. According to the Halifax bank, the only two areas to increase were Rochford in Essex and South Lakeland in Cumbria. Sixteen of the top 20 best performing areas were in southern England.
http://www.bbc.co.uk/news/business-17083529

Let’s be completely bipartisan about this. When Heseltine, a Euro enthusiast, was DTI minister, his personal economic adviser, Walter Eltis, was saying that it wasn’t a good idea for Britain to join – see his book: Britain, Europe and EMU (Palgrave 2000). This is another clear example of how politicians are taken by enthusiasms without understanding the economic implications of what they propose.

I am forever posting links to him, but Martin Wolf’s latest Economists Exchange entry, concerning balance of payments crises within currency unions, is worth a read

http://blogs.ft.com/martin-wolf-exchange/2012/02/16/can-one-have-balance-of-payments-crises-in-a-currency-union/#axzz1mk7xuEK1

@22 Luis – Thanks for that link, which I had missed.

The great tragedy is that the potential balance of payments problems within EMU were foreseen in those references to articles in the Foreign Affairs periodical cited @8, which were just swept away by the Europhiles in their enthusiasm for getting ever closer to European integration. We are where we are because of that.

See also that book in two parts: Both Sides of the Coin, by James Forder and Christopher Huhne. The Europhiles were just blind to the potential downsides of EMU and we are having to pay the price for that. Just before the 2005 election, Charles Kennedy, then LidDem leader, was interviewed on the BBC Today programme by Humphreys who threw in a question about Britain joining the Euro. Kennedy’s instant response was: it was a missed opportunity. He really didn’t have a clue.

@18 Luis

Spot on.

@20

OK keep kidding yourself. British governments have been trying it for decades. It’s never worked. How long will it take for the message to get through?

Got to love the fanatics..

@25: “OK keep kidding yourself. British governments have been trying it for decades. It’s never worked. How long will it take for the message to get through?”

Yeah. The consequence of taking the Pound out of the Gold Standard in September 1931 was that the Pound depreciated by 25 pc. Without the need to prop up the exchange rate to maintain the Gold parity of the Pound, the BoE cut the bank rate to 2 pc by April 1932 and it stayed there until war loomed in the late summer of 1939. With low interest rates, there was a speculative boom in house building in the south of England and parts of the midlands – as well as booms in building cinemas and new factories. The British economy grew through to 1937. The benefits of that growth were not evenly distributed but the British economy performed relatively better during the 1930s than did the economies of other industrialised economies in Europe.

When the Pound was forced out of the European Exchange Rate Mechanism (ERM) in September 1992, it depreciated by 25 pc. By the final quarter of 1995, Britain’s standardised ILO unemployment rate was lower than that of France, Germany or Italy, and Britain’s employment rate of working age-people was higher.

Lower GDP and higher unemployment are the real costs of an over-valued exchange rate.

@ 27,

the main ‘benefit’ of getting off the Gold Standard, was that the BofE got to keep all the gold it would otherwise have had to pay out, so that boom was at the expense of countries like the Netherlands and France, and many others besides, who had been foolish enough to have faith in the BofE honouring its commitments.

The reason the pound came under pressure prior to that decision was due to the loose, inflationary policy the BofE had pursued in the previous years, and when the chickens started coming home to roost, it repudiated its debts. The consequences went much further than a domestic building boom.

20. Richard W

Devaluation always works if the price was wrong. The key thing is not to have an undervalued currency or an overvalued currency, but a correctly valued currency.

I agree it is sensible to have a correctly valued currency but I am not sure what you mean by devaluation always works. In the short term, sure. But in the medium and long terms? The problem with devaluation is that having done it once, it becomes increasingly easy to do it again. No country that has a long history of devaluations has a strong economy. It may have worked for Argentina but then do we really want to copy Argentina? Look not at the immediate aftermath of devaluation but the entire 20th century – with many devaluations. Britain did not devalue after the Napoleonic Wars when perhaps it should. It went on to 100 years of strong growth. British did devalue after WW1. It went on to have a miserable 20th century. Devaluation destroys investor confidence. It cheats people who save. It is a cheap and easy way out of problems and hence a way of avoiding the tough choices. I am unconvinced that it works.

Fixing the price will always eventually be the wrong price. Therefore, the correct exchange rate policy is benign neglect. Float the currency and forget about it and let financial markets determine the price based on supply and demand to hold that currency.

I tend to think benign neglect is the correct solution to everything, but I am not convinced that floating is the best solution for currencies. It is *a* solution and vastly better than managing your currency. But the alternative is not to change the currency but to change the underlying economy. To make the tough fiscal and economic decisions that will defend an exchange rate. It is inevitable that people have to make those decisions in the end – so why not make them soon? Germany did. They have a devalued currency, but they also undertook the tough economic reforms the Greeks and Italians will now be forced to do. It is better to reform your economy than to devalue your currency. The latter is bad in so far as it is an alternative for the former.

SMFS: “British did devalue after WW1. It went on to have a miserable 20th century. ”

That’s pathetic – a complete travesty of history. On Britain’s economy in the 1930s after abandoning the Gold Standard in September 1931, try Feinstein et al: The European Economy Between the Wars (OUP) or Harry Richardson: Economic Recovery in Britain 1932-39 (Weidenfeld & Nicolson).

Britain’s economy grew strongly in the 1930s after the trough of the slump and performed better than the other large European economies which maintained the Gold parity of national currencies. Any familiar with the south of England can easily find rows and rows of speculatively built semi-detached houses built during the 1930s after the bank rate was cut to 2pc in April 1932. That is hardly the sign of an acutely depressed economy.

A couple of years back I went to listen to a talk with slides about cinemas in south London – collecting pics of cinemas and their histories was the speaker’s hobby. It turns out that extraordinarily large number of the Odeon and Gaumont cinemas – many are now bingo halls – were built and opened around 1936 as “palaces” of popular entertainment.

Try this on London in the 1930s:
http://www.20thcenturylondon.org.uk/server.php?show=nav.41

Leicester in the midlands was ranked as the second wealthiest city in Europe in a League of Nations report. The problem was this relative boom left out south wales, the north of England and Scotland. For Britain, the 1920s were more miserable than the 1930s because of restoring the Gold Standard at the pre-WW1 parity.

29. So Much For Subtlety

” I agree it is sensible to have a correctly valued currency but I am not sure what you mean by devaluation always works. In the short term, sure. But in the medium and long terms? The problem with devaluation is that having done it once, it becomes increasingly easy to do it again.”

What I do not mean is that devaluation is good per se. If you fix your currency and get to a stage that self-evidently the peg is the wrong price, in those circumstances it is often good because one is moving from the wrong price to something closer to a more realistic price. The key thing is not to get to a stage where the external value of the currency is the wrong price. Of course, the external value of the currency is not the fundamental problem, it is merely a symptom. The real cause are inflexibilities in the rest of the economy that are exacerbated with the fixed price of the currency.

” No country that has a long history of devaluations has a strong economy. ”

Tend to agree with you there. However, you have to consider the nuance of what is going on. They are having to deal with the consequences of other inflexibilities and problems in the rest of the economy that prevent them from being a strong economy. Devaluation alone will not make those problems go away and turn a weak economy into a strong one. The problems will keep coming back at the new price until they address the fundamental issues. However, the external fixed or pegged price of a currency is not something handed down by the gods. It was fixed or pegged by politicians and bureaucrats. Perhaps you think they are infallible, I suspect you do not and neither do I. Presumably you believe that all other prices in the economy should be flexible. Labour, for example. There is nothing magical about a currency that should prevent it also being flexible to changed circumstances.

I can appreciate the necessity of nations in the developing world having fixed currencies. Moreover, it was probably a good idea for us in the 19th century when we were at their stage of current development. However, there is no need for developed world nations not to freely float. That way adjustments in the external value of the currency are happening instantaneous and automatically as new information emerges. The EZ members were deluded into believing that they were fixing against each other. The reality is that they are pegged against Germany. Fine for the likes of The Netherlands, Austria, Finland etc, not so fine for Greece et al.

” Britain did not devalue after the Napoleonic Wars when perhaps it should. It went on to 100 years of strong growth. British did devalue after WW1. It went on to have a miserable 20th century. ”

We did. See any information about ‘ the crisis of silver currency and bank notes (1750–1870). ‘
http://en.wikipedia.org/wiki/Great_Recoinage_of_1816

I would not be so confident in Britain’s record in the distant past. What British officials did do was to change (reduce) the coupons on outstanding debt issues. In 1752, the Chancellor of the Exchequer Sir Henry Pelham converted all outstanding issues of government debt to one, Consolidated 3.5% bond. Thus reducing how much the Treasury was paying out to investors. In 1757, the coupon rate was again reduced on the stock to 3%. Chancellor of the Exchequer, George Joachim Goschen, reduced it again to 2¾% in 1888. See the Goschen’s Conversion. During our naval arms race with Germany, the coupon rate of the stock was again reduced to 2½% in 1903. Nothing in fixed exchange rates prevent the government from just unilaterally changing the rules if they are so minded.

” Devaluation destroys investor confidence. ”

It does the opposite. The loss of investor confidence is the catalyst that makes devaluation necessary. Investor confidence returns with a new realistic exchange rate. With sovereign debt after a default, on average nations who have defaulted return to private capital markets after five years. I would not invest a penny in the current Greece even though they are using the strong euro because it is the wrong price for them. If they left the EZ, and their new currency experienced a 50% depreciation, they are immediately a different prospect. I would then consider putting money to work in Greece. So, strong currency, no confidence because it is the wrong price. Weak currency at a realistic price and that increases my confidence.

” It cheats people who save. It is a cheap and easy way out of problems and hence a way of avoiding the tough choices. I am unconvinced that it works. ”

It makes absolutely no long-run difference because money is long-run neutral. The nominal external strength of a currency is just a form of money illusion. A strong external value of a currency will raise the domestic price level of non-tradable goods and services. As anyone who has ever bought a coffee or a haircut in Geneva will testify. See the:

Penn effect

Balassa–Samuelson effect hypothesis

http://en.wikipedia.org/wiki/Penn_effect

http://en.wikipedia.org/wiki/Balassa%E2%80%93Samuelson_effect

Income and wealth ultimately come from productivity and not the exchange rate.

Of course, changing the nominal exchange rate will just lead back to the same problems if one does not make the tough choices of dealing with the root cause of the problems.

” It is *a* solution and vastly better than managing your currency. ”

Well fixing or pegging your currency is de facto managing it.

” But the alternative is not to change the currency but to change the underlying economy. ”

I agree.

” To make the tough fiscal and economic decisions that will defend an exchange rate. It is inevitable that people have to make those decisions in the end – so why not make them soon? Germany did. They have a devalued currency, but they also undertook the tough economic reforms the Greeks and Italians will now be forced to do. It is better to reform your economy than to devalue your currency. ”

As I have said, I agree that devaluation is not a solution in itself if you do not deal with the problems that made the devaluation necessary. However, more fundamentally one should not fix the currency at all, let it float and the market will determine its true value. Or if one is going to fix in a monetary union, do not do effectively fix with an economically strong nation when you you are not an optimum currency area. Italy maybe can reform and make the necessary adjustments. The likes of Greece can’t because the adjustment is too great and would effectively lead to social disintegration before they get there. I hope I am wrong, albeit I suspect not.

Market fundamentalists might like to note that Milton Friedman advocated flexible exchange rates:
http://www.interfluidity.com/files/friedman-flexible-exchange.html

There are two academic papers in PDF format, accessible on the internet, advocating flexible exchange rates by Harry Johnson and Charles Kindleberger and a more recent paper from 2001 by Kenneth Rogoff, a previous chief economist at the IMF: On Why Not A Global Currency. Rogoff’s paper is highly critical of Friedman’s 1953 paper.

Rogoff: “I will argue here that the status quo arrangement among the dollar, yen and the euro (which I take to be benign neglect) is not far from optimal, not only for now but well into the new century. And it would remain a good system even if political obstacles to achieving greater monetary policy coordination – or even a common world currency — could be overcome.”

Surely, the notion of a World Currency must represent something approaching Nirvana for those opposing flexible exchange rates.

31. Richard W

What I do not mean is that devaluation is good per se. If you fix your currency and get to a stage that self-evidently the peg is the wrong price, in those circumstances it is often good because one is moving from the wrong price to something closer to a more realistic price. The key thing is not to get to a stage where the external value of the currency is the wrong price.

I agree with both of those. However I would also claim that the mere act of being willing to go back on your previous commitments and promises by revaluing the currency is a deterrent to economic growth in the medium and long terms. In the short term, moving closer to a realistic exchange rate is a good thing. But it does induce concern among ordinary people about the future. That implies risk which in turn implies a relative lack of confidence.

Of course, the external value of the currency is not the fundamental problem, it is merely a symptom. The real cause are inflexibilities in the rest of the economy that are exacerbated with the fixed price of the currency.

That I agree with. The solution must always be to have a more flexible economy. Floating the currency simply allows governments to put off the hard decisions and to govern on the cheap. That in turn encourages delusional thinking among the voters. Which is a vicious circle come election time. What they need is to take the plunge and stick to the peg. I have posted a comparison between Barbados and Jamaica which seems to show this – similar economies and legal systems, Jamaica devalued, Barbadoes kept its peg to the US dollar and won agreement from the Unions to restructure the economy. Barbados is now significantly richer.

Tend to agree with you there. However, you have to consider the nuance of what is going on. They are having to deal with the consequences of other inflexibilities and problems in the rest of the economy that prevent them from being a strong economy. Devaluation alone will not make those problems go away and turn a weak economy into a strong one. The problems will keep coming back at the new price until they address the fundamental issues.

So we are in agreement there. It is just that I tend to see devaluation as a way of governments avoiding addressing the fundamental issues. A peg of some sort forces them to do so. They have no choice. That is a good thing I think. If they don’t have that external discipline they will just kick the can down the road (and can anyone explain why these phrase has become so popular on the internet recently?) until after the next election.

However, the external fixed or pegged price of a currency is not something handed down by the gods. It was fixed or pegged by politicians and bureaucrats. Perhaps you think they are infallible, I suspect you do not and neither do I. Presumably you believe that all other prices in the economy should be flexible. Labour, for example. There is nothing magical about a currency that should prevent it also being flexible to changed circumstances.

I agree a fixed price is not handed down by the Gods – although you may quibble about the price of gold. I also agree at some point someone pegged it. I definitely do not think anyone is infallible. I also agree there is nothing about a currency that should prevent it being flexible except that it is better if it is not. After all currencies are a little different from other policies. They do allow every country to engage in predatory devaluations which are a bad thing – I hope we agree on that. Which is a shame as that seems to be what America is trying to do right now. They mean countries do not really compete with each other in the long run. They have wider effects. And a devaluation allows governments to cheat too easily. They can impoverish people without them noticing. If Greece had devalued, Greeks would be poorer, but it would not be so easy to see. These are all good reasons to insist on honesty with a peg.

However, there is no need for developed world nations not to freely float. That way adjustments in the external value of the currency are happening instantaneous and automatically as new information emerges.

Well adjustments would be made instantaneously and automatically with the right sort of peg too. I think there are still good reasons not to float. One is that the evidence seems to be that people who do not float tend to do better in the long run. Or at least people with the self discipline to manage a fixed currency do better than those without. I am not convinced the peg will teach people to be more self disciplined but it cannot hurt. Secondly, if people are given a free choice of currency, I do not believe they would choose a fiat currency that floats. They would vote for low inflation and a fixed exchange rate. Fixed against some external value beyond the reach of governments. If that is what people want, there is probably good reason for it.

It does the opposite. The loss of investor confidence is the catalyst that makes devaluation necessary. Investor confidence returns with a new realistic exchange rate.

In the short term. Argentina and Greece have long histories of debasing their currencies. Germany and Switzerland do not. Where is the money flowing? Not from Switzerland to Greece. Greece really does not have any economy apart from tourism and a little agriculture. Germany on the other hand does.

If they left the EZ, and their new currency experienced a 50% depreciation, they are immediately a different prospect. I would then consider putting money to work in Greece.

Yes but presumably you would factor in the likelihood of yet another devaluation in the future and so price it accordingly? Whereas I certainly wouldn’t in a place like Switzerland.

It makes absolutely no long-run difference because money is long-run neutral. The nominal external strength of a currency is just a form of money illusion. A strong external value of a currency will raise the domestic price level of non-tradable goods and services. As anyone who has ever bought a coffee or a haircut in Geneva will testify.

I am not arguing for the currency to be strong per se, but for it to be free of political manipulation in so far as that is possible. Although I am not very confident about doing that either. I do not think it matters if the currency is strong, I think it matters if there is certainty. I think it matters if people know the government will make the tough choices if they are the right choices rather than flip to a burlesque show just because that is cheap politics. I don’t think the Penn effect is relevant here.

Income and wealth ultimately come from productivity and not the exchange rate.

I agree totally. But productivity depends on investment in people and in plant. That implies a long term view of the economy. The more that you think the currency is run like a casino, the less you will be willing to make those sort of long term investments. The more that investment will be short-term plundering, at best, and the more expensive it will be. I like certainty, stability, long periods of growth with low interest rates. Inflation and devaluation both are symptoms of countries that have none of those things.

Well fixing or pegging your currency is de facto managing it.

Or letting someone else do it for you. Sort of. It is one step removed from political interference and it sends a strong message to the market. That matters.

As I have said, I agree that devaluation is not a solution in itself if you do not deal with the problems that made the devaluation necessary.

But if you devalue, the political heat goes away. There is now no pressing need to restructure. This is precisely what British governments did from 1945 to 1979. It was easier to let the pound slide than it was to take on the Unions. We surely will agree it is a shame that Britain did not embrace Thatcherism much sooner?

However, more fundamentally one should not fix the currency at all, let it float and the market will determine its true value. Or if one is going to fix in a monetary union, do not do effectively fix with an economically strong nation when you you are not an optimum currency area.

I certainly agree it is better not to fix it to an economically strong currency area if your economies are not aligned, but it has worked for Hong Kong. Do they really share an optimal currency area? The addition stupidity here is that the Euro is not merely a peg but a shared currency. At least Hong Kong has its own interest rates, as we all did under the ERM.

By the way, Hong Kong defended its peg at huge cost during the Asian Financial Crisis. The rest of South-east Asia did not. How did that work out in the long run? Hong Kong worse off than say Indonesia?

Italy maybe can reform and make the necessary adjustments. The likes of Greece can’t because the adjustment is too great and would effectively lead to social disintegration before they get there. I hope I am wrong, albeit I suspect not.

I agree Greece and probably Portugal have left it too late. They should have done so sooner. Maybe Italy can. We will see. But I still see the currency as less important. The main issue is economic reform at home. The Euro did not push the Greeks into that reform. The gold standard would have soon I think. As the ERM probably would have. The Euro is perhaps not the worst of all possible worlds, but it would take me a minute to think of one worse.

@33 SMFS: “Floating the currency simply allows governments to put off the hard decisions and to govern on the cheap”

Try reading the quotes from Friedman linked @32.

Britain’s economy in the 1930s would have been far more depressed if the Gold standards had not been abandoned in September 1931, as that would have meant the BoE maintaining high interest rates to support the exchange rate of the Pound. There would have been no housing boom in the south of England and the midlands.

With a Nazi government installed in Germany after January 1933, the Gold parity of the Reich Mark was maintained and the government was hugely successful in reducing unemployment but that was achieved through a public works programme for autobahns and civic buildings, extensive state controls over prices, wages, and business investment as well as licensing controls on foreign trade and foreign currency transactions.

Compared with that, the policy of the British government amounted to something approximating to laissez-faire. The assessment of Feistein et al in: The European Economy Between the Wars (OUP) is that the laissez-faire approach of the British government proved to be the more effective policy for recovery from the depression.

34. Bob B

Britain’s economy in the 1930s would have been far more depressed if the Gold standards had not been abandoned in September 1931, as that would have meant the BoE maintaining high interest rates to support the exchange rate of the Pound. There would have been no housing boom in the south of England and the midlands.

So, you think a housing boom was a good thing? You think it was sustainable? You think that driving interest rates down, and the currency, did much except create a speculative bubble? Notice that the real economy, apart from cars I suppose, was in deep trouble in the 1930s.

With a Nazi government installed in Germany after January 1933, the Gold parity of the Reich Mark was maintained and the government was hugely successful in reducing unemployment but that was achieved through a public works programme for autobahns and civic buildings, extensive state controls over prices, wages, and business investment as well as licensing controls on foreign trade and foreign currency transactions.

So … the Nazis maintained the Gold Standard and their economy did even better than Britains? I am not sure much of this is true, but in so far as it is, what are you trying to show Bob? That the Gold Standard was better?

Compared with that, the policy of the British government amounted to something approximating to laissez-faire. The assessment of Feistein et al in: The European Economy Between the Wars (OUP) is that the laissez-faire approach of the British government proved to be the more effective policy for recovery from the depression.

Like to compare unemployment rates? Define effective. One of the many many problems with floating is that those countries that went off the Gold Standard then engaged in competitive devaluations – seeking to restore prosperity through lowering their currency rather than reforming their economies. Something that Keynes specifically tried to stop at Bretton Woods. Britain’s prosperity was in a sense at the expense of those that stayed on Gold like America. Not through actual efficiency and productivity gains. This is bad. After all, if everyone went off Gold either Britain would not have benefited at all, or international trade would have dried up, as it did, as everyone pushed their currency lower.

We have a currency union, for now, with Scotland. Arguably Scotland would benefit from their own currency. I think they should have one. At least pegged to the pound. Everyone in favour of floating currencies going to agree that Hull should have its own currency?

@35 SMFS: “Sorry Bob, but the people you are attacking were pointing this out over a decade ago. It has been standard on the Right for years. It has been the Keynesians who have been denying it.”

That’s more demonstrable rubbish. I was first made aware of the pending pitfalls of EMU in 1996 on reading the late Rudi Dornbusch in the US periodical Foreign Affairs, issue for September 1996: Euro fantasies:
http://www.foreignaffairs.com/articles/52431/rudiger-dornbusch/euro-fantasies-common-currency-as-panacea

The essential elements of that same analysis, showing the destabilising effects on EMU of diverging competitiveness, are represented in his popular, mainstream undergraduate text: Dornbusch et al: Macroeconomics (McGraw Hill). That text has a characteristically keynesian flavour.

The Nazi government in Germany posy January 1933 was hugely successful in bringing down unemployment while maintaining the Gold parity of the Reich Mark: ” . . from 6 million in October 1933 to 4.1 million a year later, 2.8 million in February 1935, 2.5 million in February 1936, and 1.2 million in February 1937.” [CP Kindleberger: The World in Depression 1929-1939 (Allen Lane, 1973) p.240]

But that was through massive state intervention and regulation, including controls over prices, wages (the trade unions were destroyed), foreign exchange transactions and by import licensing. In comparison, the British government adopted a more-or-less laissez-faire approach, including allowing the Pound to float in the foreign exchange market. After the Gold standard was abandoned in September 1931, the Pound depreciated by c. 25 pc and – importantly – the BoE was placed to cut the bank rate to 2 pc by April 1932. It stayed there until the summer of 1939.

Of course, the boom in house construction in Britain during the 1930s wasn’t sustainable – it crucially depended on maintaining the low interest rates made possible by abandoning the Gold parity of the Pound. The boom in house building created jobs and meant that real GDP was higher than it would otherwise have been.

The assessment of Feinstein et al is that Britain’s economy in the 1930s with laissez-faire performed better than the German economy did with interventionist Nazi economics but there is no doubt that Nazi interventionist economic policy was very successful at reducing unemployment. Keynes returned from giving a lecture in Hamburg in January 1932 – a year before Hitler became Reich Chancellor – and wrote an article for the New Statesman: “Germany today is in the grips of the most powerful deflation any nation has experienced . . ” [DE Moggridge: Maynard Keynes (1992) p.539].

Somehow, I doubt that anyone will make much headway nowadays by saying the way to restore the competitiveness of a national economy while maintaining a fixed exchange rate and reducing unemployment is by adopting Nazi economics.

SMFS you are simply but deeply ignorant.

36. Bob B

That’s more demonstrable rubbish. I was first made aware of the pending pitfalls of EMU in 1996 on reading the late Rudi Dornbusch in the US periodical Foreign Affairs, issue for September 1996: Euro fantasies:

That is interesting but not only irrelevant but logically stupid. Just because there was one person on the Left condemning the idea, it does not mean everyone on the Left was doing so. Nor does it mean the Right was not. Your little anecdote is not evidence. It is nonsense.

Not that I accept Dornbusch as being on the Left.

The essential elements of that same analysis, showing the destabilising effects on EMU of diverging competitiveness, are represented in his popular, mainstream undergraduate text: Dornbusch et al: Macroeconomics (McGraw Hill). That text has a characteristically keynesian flavour.

Et. al. So someone else helped him. That person would be Stanley Fisher wouldn’t it Bob? You know, one of the most distinguished Keynesians still alive today. Someone who was a Salt Water economist – unlike Dornbusch who went to Chicago. It is not impossible that Dornbusch is a Keynesian, but he would have been very lonely at Chicago if he was.

After the Gold standard was abandoned in September 1931, the Pound depreciated by c. 25 pc and – importantly – the BoE was placed to cut the bank rate to 2 pc by April 1932. It stayed there until the summer of 1939.

Fuelling a housing boom, not investment in Britain’s productive economy. Heavy industry in particular stagnated. All signs of misallocation of resources and a credit bubble. Not good things.

The assessment of Feinstein et al is that Britain’s economy in the 1930s with laissez-faire performed better than the German economy did with interventionist Nazi economics but there is no doubt that Nazi interventionist economic policy was very successful at reducing unemployment.

It is hard to imagine anyone praising Hitler, or even his economic policies. Not the least if your name happens to be Feinstein. You keep saying this as if it means anything. It doesn’t.

Somehow, I doubt that anyone will make much headway nowadays by saying the way to restore the competitiveness of a national economy while maintaining a fixed exchange rate and reducing unemployment is by adopting Nazi economics.

I agree. And yet Nazi economics, like much else the Nazis did except kill Jews, has been enormously influential.

SMFS you are simply but deeply ignorant.

From you Bob, that is praise indeed.

@37 SMFS: “That is interesting but not only irrelevant but logically stupid. Just because there was one person on the Left condemning the idea, it does not mean everyone on the Left was doing so. Nor does it mean the Right was not. Your little anecdote is not evidence. It is nonsense.”

That’s just more rubbish from you. Dornbusch – a professor at the MIT who was born a German national – wasn’t the only prominent economist to foresee the potential stability problems of the EZ. Another was Marty Feldstein – see the link @8 – now a professor at Harvard, who was the first chairman of Pres Reagan’s Council of Economic Advisers.

You are demonstrably ignorant and totally clueless about this and most other subjects you post about.

“Fuelling a housing boom, not investment in Britain’s productive economy. Heavy industry in particular stagnated. All signs of misallocation of resources and a credit bubble. Not good things.”

By the assessment of Feinstein et al, Britain’s economy with a more-or-less laissez-faire policy stance performed relatively well during the 1930s, after the trough of the depression, compared with the other large European economies which maintained the Gold parity of national currencies.

The notable competitor for the accolade of better performer was Nazi Germany, which did maintain the Gold parity of the Reich Mark with extensive state regulation of prices, wages, investment, trade and foreign exchange. As the result of a substantial public works programme, German unemployment was dramatically cut – see the quote from Kindleberger @36. Is that your preference for restoring the failing competitiveness of EZ economies? Are you now advocating extensive state regulation of the troubled EZ economies, linked to public works programmes to reduce unemployment?

The problem in Britain during the 1930s was that the construction boom resulting from low interest rates was largely confined to the south of England and the midlands. It’s just nonsense to suggest that the traditional industries in south Wales, the north of England and Scotland would have fared better from higher interest rates and a stronger Pound, which would have made the staple exports of the traditional heavy industries, such as coal, less competitive in world markets. In the US, the Roosevelt administration in 1934, with authority from Congress, changed the value of the dollar from $20.67 to the troy ounce to $35 to the troy ounce, a devaluation of over 40%.

Btw if Britain is now to fix the exchange rate of the Pound as you urge, is that to be against the Euro or the US Dollar and by exactly what policy instruments is the adopted fixed exchange rate to be maintained?

Germany did not force Greece to borrow anything.
Germany did not force Greece to cook its books.
Germany did not force Greece to inflate the public sector and to overspend on the Olympics.
Germany did not force Greece to stop collecting taxes.

No, the problem is clearly with Greece: http://andreasmoser.wordpress.com/2012/01/24/evangelos_venizelos/

AM: “No, the problem is clearly with Greece”

You plainly have absolutely no insight into why the whole EMU project was fundamentally flawed from the start.

Try the citations @8 to Delors and two distinguished American academics.

Th OP writes:

> But there’s not a chance in hell of the ECB devaluing to save Greece, because it would have negative consequences for consumers in northern Europe, making their imports and foreign holidays more expensive.

Why say ‘northern consumers’ when Euro devaluation would make imports more expensive for ALL EZ consumers.

JV

PS – He must mean ‘holidays outside Europe’ for ‘foreign holidays’ – as if Greece devalued, holidays there would be cheaper for non-Greeks not more expensive !

38. Bob B

That’s just more rubbish from you. Dornbusch – a professor at the MIT who was born a German national – wasn’t the only prominent economist to foresee the potential stability problems of the EZ. Another was Marty Feldstein – see the link @8 – now a professor at Harvard, who was the first chairman of Pres Reagan’s Council of Economic Advisers.

I do enjoy talking to you Bob. You’re really good value for money. Not being content with citing the inventor of Supply-side economics as a Leftist, you are now claiming that perhaps the only man to the right of Reagan on economic matters is a leftist too. Feldstein is perhaps the most distinguished living neo-Classical economist I can think of offhand. Well done.

You are demonstrably ignorant and totally clueless about this and most other subjects you post about.

Keep up the good work Bob. It is not my credibility you’re burying.

By the assessment of Feinstein et al, Britain’s economy with a more-or-less laissez-faire policy stance performed relatively well during the 1930s, after the trough of the depression, compared with the other large European economies which maintained the Gold parity of national currencies.

Good for them. So what?

Is that your preference for restoring the failing competitiveness of EZ economies? Are you now advocating extensive state regulation of the troubled EZ economies, linked to public works programmes to reduce unemployment?

Having built a strawman why do you feel the need to argue with it?

The problem in Britain during the 1930s was that the construction boom resulting from low interest rates was largely confined to the south of England and the midlands.

Thus proving the point really. A housing boom that was not good for the country as a whole.

<i.It’s just nonsense to suggest that the traditional industries in south Wales, the north of England and Scotland would have fared better from higher interest rates and a stronger Pound, which would have made the staple exports of the traditional heavy industries, such as coal, less competitive in world markets.

I did not say that they would have. What Britain needed to do was liquidate the older uncompetitive industries and invest in new ones. Which the governments at the time and down to 1979 failed to do. What they did instead was give those industries and artificial boost by devaluing. Which meant we were stuck with them until someone got the guts to get rid of them. We should have done that in the 1930s rather than dragging it out.

SMFS: “I do enjoy talking to you Bob. You’re really good value for money. Not being content with citing the inventor of Supply-side economics as a Leftist, you are now claiming that perhaps the only man to the right of Reagan on economic matters is a leftist too. Feldstein is perhaps the most distinguished living neo-Classical economist I can think of offhand. Well done.”

I cited @8 Feldstein, the first chairman of Reagan’s council of economic advisers, precisely to show that the pitfalls of EMU were foreseen by mainstream economists affiliated to the Republicans besides mainstream “keynesians” like Rudi Dornbusch – who btw was the supervisor for Paul Krugman’s PhD degree at the MIT.

SMFS: “What Britain needed to do was liquidate the older uncompetitive industries and invest in new ones. ”

You have an extraordinary interventist prescription for economic policy in the inter-war years. During the depressed 1930s, the prevailing stance of the government at the time was more-or-less laissez-faire. The sustained position of HM Treasury was that public spending by the government “crowded out” equivalent private spending. According to the official Treasury doctrine, nothing was therefore to be gained from government spending public money on new industries.

With the lower interest rates after abandoning the Gold standard in September 1931 and the depreciation of the Pound, there was nothing preventing financiers and business from investing in the traditional and heavy industries in South Wales, the north of England and Scotland but there were better and more assured returns to be made from investing in speculative house building, in cinemas and the newer and lighter industries in the south of England and the midlands:
http://en.wikipedia.org/wiki/Great_Depression_in_the_United_Kingdom

Try that link @30 to business and infrastructure developments in London:

“By 1938 London had 36,911 factories employing 743,173 people. The capital’s main industrial sectors were engineering (230,000 jobs), clothing and shoes (180,000 jobs), food and drink (90,000 jobs), furniture (70,000 jobs) and printing and paper (67,000 jobs).

“Light industry continued to move west: Hoover, EMI and Coty all built smart new factories along the western arterial roads. On the east side of London the American car manufacturer Ford opened a mammoth factory at Dagenham in 1931. This factory was designed to make cars for the British market and for export, through London, to European and world markets.”

That’s hardly a description of an acutely depressed area. Lower interest rates and a more competitive exchange rate for the Pound certainly attracted new private sector investment in new industries – but not in the parts of Britain dependent on the traditional and heavy industries. The British government – unlike the Nazi government in Germany – had strongly held ideological objections to public works programmes and government initiatives to promote business investment in depressed areas so those areas remained depressed despite lower interest rates and a depreciated Pound.

Junk your ignorant and distorted perceptions of British government policy during the 1930s and research the real history of those times in independent sources. Another recent book for those interested: J Stevenson and Chris Cook: The Slump (Longman 2009).

No serious economist that I know of claims that sticking to the Gold standard in 1931 would have helped to promote recovery but Britain’s economy did perform relative well during the 1930s compared with peer-group countries. However, that recovery was largely confined to one part of the country.

For any readers interested, I’ve just rediscovered a link to this academic paper by Stephen Broadberry and Carsten Burhop on: Real wages and Labour Productivity in Britain and Germany 1870-1938:

“Recently, a broad consensus has been reached regarding the comparative performance of the British and German economies during the second half the nineteenth century and the first half of the twentieth century, taking labour productivity as the measure. At the outset, Germany lagged behind in all three main economic sectors – agriculture, industry, and services – but its industrial labour productivity converged towards British levels at the turn of the century and hovered around British levels until World War II. In agriculture and services, Germany lagged behind throughout the period. Consequently, economy-wide labour productivity was lower in Germany than in Britain.”
http://www2.warwick.ac.uk/fac/soc/economics/staff/academic/broadberry/wp/solgeruk7a.pdf

43. Bob B

I cited @8 Feldstein, the first chairman of Reagan’s council of economic advisers, precisely to show that the pitfalls of EMU were foreseen by mainstream economists affiliated to the Republicans besides mainstream “keynesians” like Rudi Dornbusch – who btw was the supervisor for Paul Krugman’s PhD degree at the MIT.

Yes I know Bob. But unfortunately that was my point. You were disagreeing with it. This is a follow up to a conversation which began with you objecting to my reasonable point that the Right was well aware of the problems with the euro. To be exact:

“36. Bob B

“@35 SMFS: “Sorry Bob, but the people you are attacking were pointing this out over a decade ago. It has been standard on the Right for years. It has been the Keynesians who have been denying it.”

“That’s more demonstrable rubbish. I was first made aware of the pending pitfalls of EMU in 1996 on reading the late Rudi Dornbusch in the US periodical Foreign Affairs, issue for September 1996: Euro fantasies:”

So what you then called “demonstrable rubbish” you are now agreeing with. Oh well done Bob. As I said, I enjoy having a rather one-sided conversation with you. Really I do.

You have an extraordinary interventist prescription for economic policy in the inter-war years. During the depressed 1930s, the prevailing stance of the government at the time was more-or-less laissez-faire. The sustained position of HM Treasury was that public spending by the government “crowded out” equivalent private spending. According to the official Treasury doctrine, nothing was therefore to be gained from government spending public money on new industries.

Again you have failed to understand what I said. I did not suggest that the government should actively intervene to abolish old industries. Just let the market do it. They did not, actually, adopt a laissez-faire attitude. If they did, Britain would have been much better off.

That’s hardly a description of an acutely depressed area.

No but Britain is more than London.

The British government – unlike the Nazi government in Germany – had strongly held ideological objections to public works programmes and government initiatives to promote business investment in depressed areas so those areas remained depressed despite lower interest rates and a depreciated Pound.

Not to mention Trade Union bloody mindedness that made investing in those industries in those places stupid. The sort of idiocy that saw coal miners and Glasgow dock workers strike during the war. The British government did set up all sorts of schemes for depressed areas. It did not help. Because they did not do enough to encourage new industry.

No serious economist that I know of claims that sticking to the Gold standard in 1931 would have helped to promote recovery but Britain’s economy did perform relative well during the 1930s compared with peer-group countries. However, that recovery was largely confined to one part of the country.

That is to say, it lead to an unsustainable housing bubble. Britain’s economy then went on to perform badly for the next 50 years. Devaluation only helps in the short term. It puts off tough decisions. It solves nothing. Perhaps Britain should not have gone on to the Gold Standard at the rate they chose. But going off it was not of long term benefit.

SMFS

I simply can’t be bothered to unravel your posted rubbish.