July 7, 2015 Reading Time: 2 minutes

Originally posted on the Atlas Network page


With Greece rejecting the structural reforms and other terms that it would need to implement for yet another bailout of its crushing government debt, economists are questioning whether the eurozone and its shared international monetary system were doomed to fail from the start. Writing in The Hill, Atlas Network Sound Money Project Senior Fellow Judy Shelton points out that the problem is not a common currency but a lack of fiscal discipline and accountability on the part of some European Union nations.

Some economists are comparing the European Union to the United States, with its separate layers of state and federal governments, and point out that if a single state’s economy were in trouble it would continue to receive federal expenditures — essentially, subsidies from states with healthier economies — but in Europe, individual nations fund and manage their own expansive welfare states.

Shelton points to the insights of Nobel laureate economist Robert Mundell, one of the thinkers who originally laid the intellectual groundwork for the euro. The notion that monetary union and fiscal union must accompany each other only became an issue after the practice of bailouts and other aid during economic shocks became widespread, Mundell explained. The U.S. federal government in fact has a history of letting individual states default on debt rather than bailing them out, but this didn’t affect the prospects for a shared U.S. currency.

“Mundell’s comments from that interview three years ago help to clarify, too, the futility of seeking economic salvation through monetary debasement,” Shelton writes. “Expressing dismay at the prospect of Greece exiting the euro — ‘in my opinion a great disaster for the people of Greece’ — in order to devalue a resurrected national currency, Mundell pulled no punches. ‘Yes, Greece can’t devalue without its own currency. But Greece’s problem is not an overvalued currency. The problem is an excess of debt and budget deficits. Greek debts are now denominated in euros. If Greece created a new currency in order to devalue, its debts would still be in euros and devaluation would not change that fact.’”

Read Shelton’s full analysis in The Hill.

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