That Stupid Crank Friedman On The Euro

From the Archives: Mundell vs. Friedman on the euro | FP Comment | Financial Post: "Milton Friedman My difference with Bob reflects what [I see as a major problem]. Namely, the political consequences of a monetary area that is not conterminous with a political entity. This exemplifies my pessimism and his optimism about the euro. We agree that the euro has no historical precedent. I believe we also agree that its attainment was driven by political, not economic, considerations, by the belief that it would contribute to greater political integration — the much-heralded United States of Europe — that would in turn render impossible the kind of wars which Europe has suffered so much. If achieved, political integration would render the monetary and political areas coterminous, the historical norm.

Will the euro contribute to political unity? Only, I believe, if it is economically successful; otherwise, it is more likely to engender political strife than political unity. And here, I believe, is where Bob and I differ most. Ireland requires at the moment a very different monetary policy than, say, Spain or Portugal. A flexible exchange rate would enable each of them to have the appropriate monetary policy. With a unified currency, they cannot. The alternative adjustment mechanisms are changes in internal prices and wages, movement of people and of capital. These are severely limited by differences in culture and by extensive government regulations, differing from country to country.

If the residual flexibility is enough, or if the existence of the euro induces a major increase in flexibility, the euro will prosper. If not, as I fear is likely to be the case, over time, as the members of the euro experience a flow of asynchronous shocks, economic difficulties will emerge. Different governments will be subject to very different political pressures and these are bound to create political conflict, from which the European Central Bank cannot escape."

Mundell was the genius and Friedman was the stupid crank. Really?