Thread by @FabioGhironi

There is an aspect of the debate on the costs and benefits of the euro that I have been finding increasingly unsettling. 1/n

It is the (intentional?) opacity of the anti-euro crowd with respect to the alternative exchange rate and monetary policy regime they would recommend for the countries that, in their view, would be better off outside the euro. 2/n

I have never seen an article or blog post in which the alternative is specified clearly. 3/n

There are always vague statements about the benefits of being able to rely on exchange rate adjustment (usually to restore or boost competitiveness), but that’s the extent of “clarity” that is offered. 4/n

Well, that’s disturbing, especially because the alternative matters, and especially when the arguments against the euro are made by reputable economists, even by specialists in international macroeconomics and monetary economics. 5/n

Is the alternative optimal monetary policy under a fully flexible exchange rate? Are we talking about some kind of commitment or full discretion? And what about the relation between the central bank and the government? 6/n

Or is the alternative to the euro some kind of limited-flexibility arrangement around parities that the domestic policymakers can adjust at will? Is it something else? 7/n

It matters. The frigging devil is in the details. And these are rather first-order details. 8/n

The anti-euro crowd keeps waving the flag of exchange rate weakening when needed. But are we talking about the response of a flexible exchange rate to shocks and policy actions (i.e., depreciation)? 9/n

Or are we talking about the discrete adjustment of an exchange rate parity determined by an explicit choice (i.e., devaluation)? 10/n

Those who remember the EMS crisis of the early 1990s may remember that key to the Single Market not being derailed already then was that it could *not* be argued by policymakers in the countries whose competitiveness was affected negatively 11/n

that, for example, the loss of value of the lira was the outcome of an intentional parity adjustment and continued depreciation driven by beggar-thy-neighbor pursuit of competitiveness by the Bank of Italy. 12/n

The Bank of Italy defended the parity as long as it could. The Bundesbank invoked the Emminger Letter. And then all bets were off. 13/n

But it *was not* a clearly beggar-thy-neighbor devaluation of the sort that the anti-euro crowd would be so happy to see some central banks still to have in their arsenal. 14/n

And the arguments I have seen that the Single Market would *not* be at risk if, say, the Bank of Italy started playing the devaluation game keep missing the most important point: 15/n

Given the conversations that were going on in France and Germany in 1992-93, it would be surprising indeed if Italy could get away with competitive devaluations without any trade policy retaliation ever coming from its partners. 16/n

And that would be the end of the Single Market. It is not about transaction costs. It is much more about international monetary cooperation under tariff threat (title of a very interesting 1990 JIE article by Basevi et al). 17/n

It is a point that @B_Eichengreen and I made in a 1996 paper: faculty.washington.edu/ghiro/EiGhiroE… 18/n

So, leaving aside that present consensus interpretation of existing rules is that countries leaving the euro would have to leave the EU, forget about countries (at least those of non-negligible size, whose actions would create significant externalities) 19/n

being able to adjust exchange rates at will without posing significant risks to the Single Market, and without eventually facing the consequences of retaliatory policies. 20/n

That would leave market-determined adjustments of a freely fluctuating currency as the feasible, desirable shock absorber for an Italy back on the lira, or a Greece back on the drachma, hoping not to face policy retaliation when the currency weakens. 21/n

Right. A couple of questions:

Do we really think that the partners wouldn’t respond in any way when the currency weakens in response to, say, aggressive monetary policy expansion? 22/n

And even forgetting about this problem, do we think that Italy, back on the lira, would suddenly become a model country for the conduct of its monetary and fiscal policies under flexible exchange rates? 23/n

Seriously? Have you actually been paying any attention to Italy’s economic policy & political history? Would you trust the lunatics who have the ear of the current Italian government to run monetary & fiscal policies conducive to any kind of stability? To any actual growth? 24/n

If you claim that you would, I am sorry, but all I can conclude is that either you are very ignorant about Italy or you are just promoting the sales of your book or both. 25/n

And you are just as irresponsible as @JosephEStiglitz was when he indicated Chavez’s Venezuela as a model, backing positions that would put Italy and other countries on the path to becoming Venezuela. 26/n

Oh, and to be clear: All this does not mean that the euro is perfect. It needs plenty of reform. But it sure as hell beats mightily vague alternatives and the crazy ideas by the Lega and 5* loonies. 27/n

Finally, if you want me to take dissent seriously and actually spend time thinking about it, do me the favor of *explicitly spelling out* the characteristics of the exchange rate, monetary, and fiscal policy regime that you would recommend for Italy 28/n

and why you think that the regime you recommend would actually be credibly implemented and sustained by the Italian institutional and political system. n/n