Can a monetary union survive without centralised financial supervision? Can it survive without a strong central fiscal authority? These are key questions for EMU going forward. Two articles in the FT advance the debate by pointing to two very different types of spillover that would seem to imply a need for collective action.
Author: Kevin O’Rourke
In recent months, several analysts have argued that the unprecedented trade collapse the world is currently experiencing is linked to the vertical disintegration of production. Every time the US buys one fewer Barbie doll, trade declines not only by the value of the finished doll, but by the value of all the intermediate trade flows that went into creating it.
Not being a theorist, I have been puzzled by the argument for a while, but I now think I may understand.
This is exactly why people were arguing for coordinated stimulus programmes earlier this year.
The FT has a nice piece on Latvia this morning. To my mind the most interesting sentence in it was the following:
IMF officials have indicated that the organisation was divided over the wisdom of defending the lat’s peg but was finally persuaded by pressure from Riga’s EU partners as well as the Latvian government’s own refusal to contemplate devaluation.
If there is one thing we have learned about international currency markets in the past couple of decades, it is that fixed exchange rates and internationally mobile capital don’t sit well together. A European response to this general lesson has been to go for full monetary integration — EMU — rather than stick with unstable intermediate arrangements such as the EMS.
There are logical consequences for how we deal with Latvia. If the country’s EU partners don’t want it to devalue, they should offer it immediate EMU membership. If they don’t do this, then we can probably leave aside the normative point that Latvia ought in its own interests devalue, since as a positive matter it will almost certainly be forced to be. As this article points out, a forced devaluation would have repercussions far beyond Latvia. It would be nice to avert a crisis before the fact rather than after it, for once.
Those of you familiar with Sergeant Lewis’ character in the Inspector Morse series may find it appropriate that actor Kevin Whately in fact comes from impeccably academic stock.