I made a bet with Iain Murray, a delightful guy from the Competitive Enterprise Institute with whom I spoke at a big Hillsdale College event in Atlanta today. We were both speakers on the program. He told me he expected a bunch of countries to drop the Euro as their currency by March 2013. “Which ones,” I asked. “Spain, Italy, and Greece,” he answered. So we made a bet. I bet him that that won’t happen. If even one of those countries doesn’t leave, I win.
I remember Milton Friedman saying that when he looked back at his predictions, he had almost always been right about the direction and almost always wrong about the timing. He had always predicted that changes would happen more quickly than they did. That’s what I think Iain did. It’s what I did back in 2001 when I bet an official from Austria’s central bank that at least one country would have left the Euro by 2006.
The bet: $100 at even odds.
READER COMMENTS
John David Galt
Oct 29 2011 at 1:02am
The treaty that created the Euro had two absolute conditions, which were especially important to the countries with the most stable currencies up to then, especially Germany (which was #1 until they redeemed the Ostmark at par): the stability pact, which was supposed to prevent this type of crisis by limiting members’ deficit spending; and a ban on any bailout of a member country that gets into trouble.
Both these agreements have long since proven to be toothless, and if any of the ailing countries was going to be expelled from the euro for violating the stability pact, it would have happened before the first round of bailouts.
So I predict that the *best*-off members of the euro — especially Germany — will be the ones who withdraw from it, even if they have to leave the EU to be able to leave the euro.
I also predict that Britain and other non-euro-member countries will consider leaving the EU rather than bear the cost of continued bailouts. Britain will hold a referendum on EU membership not later than September 2013.
David R. Henderson
Oct 29 2011 at 6:07am
@John David Galt,
I think Germany is more likely than the others to leave too. So when he said some countries would leave, I said, “Like Germany?” No, that’s not what he had in mind.
Max
Oct 29 2011 at 7:34am
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George J. Georganas
Oct 29 2011 at 10:34am
If the “well-off” leave the euro and/or the EU, they need to find someone to buy goods and services from them at an exchange rate that is way further up than they now face. Switzerland had to devalue just to avoid that fate.
david stinson
Oct 29 2011 at 4:46pm
“So I predict that the *best*-off members of the euro — especially Germany — will be the ones who withdraw from it”
I tend to agree but it seems to be the minority view.
@George J. Georganas
” If the “well-off” leave the euro and/or the EU, they need to find someone to buy goods and services from them at an exchange rate that is way further up than they now face. Switzerland had to devalue just to avoid that fate.”
True, but it’s worth noting that:
a) any deutschmark (DM)/euro exchange rate would be as much the result of demand for German exports as the determinant – in other words, it works in both directions;
b) it’s probably the case that export prices (in euros) of the remaining eurozone countries would rise if Germany exited the eurozone;
c) isn’t what matters to trade comparative advantage and not absolute advantage?; and
d) I think the best way to think of the Swiss move to peg their currency was not that they did it to preserve the competitiveness of their export sector (even though it was typically presented in that way) but that they did it to maintain monetary equilibrium, i.e., to accommodate the growing demand to hold francs for investment purposes and thus relieve deflationary pressures that were resulting from that growing demand for money. The Swiss chose the exchange rate as their indicator of monetary equilibrium. The Germans would no doubt also have to accommodate the safe haven demand to hold their currency as well although they wouldn’t necessarily need to use the exchange rate as their indicator. Canada, for example, depends heavily on trade with the US and yet the Canadian dollar has strengthened dramatically against the US$.
English Professor
Oct 31 2011 at 12:18pm
Is this the place to quote Rudi Dornbusch’s comment that “in economics things take longer to happen than you think they will and then they happen faster than you thought they could”? (Larry Summers is fond of repeating this.)
English Professor
Oct 31 2011 at 12:26pm
Forgot to say that I agree that Germany’s exit would offer a quick devaluation of the euro, which would ease the painful internal devaluation that Greece is now going through and that Italy will probably need as well. Also, Dornbusch’s dictum applies not only to the Euro but to China’s housing bubble and other potential economic woes.
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