17 different member states of the European Union share a currency called the Euro, and have their monetary policy set by one central bank, the European Central Bank (ECB). Over the last year the rolling problems in Portugal, Ireland, Italy, Greece, and Spain (the so-called PIIGS) have helped demonstrate the fundamental problem of having 17 different countries that are forced to live with one currency and monetary policy setting.
The major problem I have with the structure of the Euro currency and ECB is that it’s trying to serve too many masters. A strong currency and tightening monetary policy might suit the stronger members of this union just fine (like Germany). But how is that same stance working out for any of the PIIGS countries that have very poor growth rates, too much debt, and need to foster growth far worse than they need price stability and a strong Euro? The answer, according to the credit markets, is that it’s not. The options the PIIGS are missing right now are to lower interest rates and drastically devalue their currencies in an attempt to reflate their economies. Those are options or tools that they had before they adopted the Euro and were governed by the ECB.
Currently everyone is caught up with Greece and whether it will default. It appears that the recent vote of confidence may buy them some more time. However, I don’t think folks are really stepping back and asking the bigger question here. The issue is whether or not so many diverse countries, with different growth rates and economic circumstances, should be bound by one currency and monetary policy setting. The market has showed us for over a year why it doesn’t make sense. You have to wonder how long it will take for these countries to figure that the best answer for them is to stop participating in this poorly structured system.
