by OLD1953 » Sat Dec 03, 2011 8:47 pm
There's an issue with tying high productivity countries and low productivity countries together in such a fiscal union while letting them sell their own bonds and run with different laws. This issue is caused by forcing the same rate of inflation/deflation on evey country. Suppose the Euro has an inflation target rate of 2%, and Germany has a yearly productivity increase of 4%. If both these goals are met, then a country with a productivity increase of 2% must have an inflation rate of 0%. A country that has a productivity increase of less than 2% must have deflation to make up the difference.
That's horribly oversimplified, but the point is that money will flow into the higher productivity countries, and out of the lower productivity countries, so eventually a country like Greece or Italy will collapse economically, no matter what is done otherwise. They chose to collapse via bond debasement, but if it had not been bond debasement, it would have been another road to a similar end.
There's an issue with tying high productivity countries and low productivity countries together in such a fiscal union while letting them sell their own bonds and run with different laws. This issue is caused by forcing the same rate of inflation/deflation on evey country. Suppose the Euro has an inflation target rate of 2%, and Germany has a yearly productivity increase of 4%. If both these goals are met, then a country with a productivity increase of 2% must have an inflation rate of 0%. A country that has a productivity increase of less than 2% must have deflation to make up the difference.
That's horribly oversimplified, but the point is that money will flow into the higher productivity countries, and out of the lower productivity countries, so eventually a country like Greece or Italy will collapse economically, no matter what is done otherwise. They chose to collapse via bond debasement, but if it had not been bond debasement, it would have been another road to a similar end.