Speaking of uncle Miltie

["Ian Murray" <seamus2001@xxxxxxxx>]

< http://www.ireland.com/newspaper/finance/2001/0905/fin18.htm >
Wednesday, September 5, 2001
US economist expounds
on great euro mistake


ON WALL STREET/Conor O'Clery
The launch of the euro coinage last week brought yet another warning
from Prof Milton Friedman that the whole thing is a great mistake.

America's best-known economist cited Ireland to make his case in an
Italian newspaper.

Here was a state, he said, which should be tightening its monetary
policy, but couldn't, because it was tied into the new European
currency.

I called the 85-year-old Nobel Laureate at his home in California and
asked him to expand on this.

"Ireland is an interesting case with respect to the euro," he said.
"It cannot have a separate monetary policy. The European Central Bank
makes monetary policy for the whole of euroland. The interesting thing
about Ireland is that it has been growing much more rapidly than the
rest of euroland and that has given it a balance of payments surplus
and it has also caused a rise in prices, so that so far the euro has
brought inflation to Ireland.

"Within the euro that balance of payments surplus means that you are
taking in more euros than you are paying out, and that means that the
money supply in Ireland is growing much more rapidly than the money
supply in the euro as a whole."

So what would the correct monetary policy for Ireland be?

"Stable prices - the general recipe which has been most successful in
most other countries," he replied. "The first example I guess is New
Zealand which targets inflation at about 2 per cent to allow for the
deficiencies in the index."

If Ireland had an independent monetary policy "the Irish punt would
have appreciated relative to other currencies", continued Prof
Friedman, who maintains that rough price stability in the euro as a
whole has meant 15-20 per cent inflation in consumer prices in
Ireland, and that stable prices in the Republic would have required a
15-20 per cent appreciation of the punt versus the euro.

"The balance of payment surpluses would have been matched by either
importing physical goods or by making foreign investments, but because
of the connection with the euro, your balance of payments surplus has
not been used to add to the stock of physical goods, it's been used to
add to the stock of money," he stated.

This is not the first time the euro has come under attack from the
libertarian economist who inspired Margaret Thatcher and who in the
1950s predicted the breakdown of the post-war Bretton Woods system of
fixed exchange rates. He has been engaged in a public debate with Dr
Robert Mundell, the Canadian economist and Nobel Prize winner who is
known as the "godfather" of the euro for his theories on monetary
zones.

Dr Mundell (69) advocates a global economy under one world currency,
and rejects Mr Friedman's contention that individual countries need
flexible exchange rates to absorb the shocks of economic change.

The exchange rate is not a real economic cushion against economic
shocks such as a rise in the price of oil, maintains Dr Mundell.

In his opinion countries will ultimately see the benefits of adopting
internal market-based reforms under a fixed currency regime, while
Prof Friedman maintains that internal politics inhibit individual
countries from adopting proper market-based reforms, necessitating
flexible exchange rates.

As time went by, Prof Friedman told me, there would be serious
differences in the EU over the policies the European Central Bank
should follow.

"You know, it's an ironic thing in a way," he said, "the euro was
adopted really for political purposes, not economic purposes, as a
step toward the myth of the United States of Europe. In fact I believe
its effect will be exactly the opposite."

The need for different policies, like tightening monetary policy in
Ireland or a more flexible monetary policy in Italy, "will produce
political tensions that will make it more difficult to get political
unity". The euro had no historical precedent, Prof Friedman emphasised
.

Never before had there been a multi-nation money. Gold served as a
pseudo world currency in the 19th and early 20th centuries but "the
gold standard wasn't the same thing because each country separately
had the ability to break with the gold standard and set its currency
free, or change its par, devalue or appreciate it", he said.

But now Ireland was stuck with the euro. "How would you break out, and
start all over again to establish a new monetary system, the punt? You
are not going to give it up. You have locked yourselves together and
thrown away the key."

As to the obvious question, given the political debate in Britain,
should the UK stay out of the euro? "Absolutely," replied the
economist, who likes to paraphrase Clemenceau's famous remark about
war, saying that money is much too serious a matter to be left to
central bankers.