Wednesday, May 19, 2010

The Greek debt crisis and the euro.

When he spoke at The Heritage Foundation last month, supply-side founding father and Nobel Laureate Robert Mundell explained that since its inception, the euro's value against the dollar has been highly unstable. It started at $1.18 in 1999, dropped to $.82 in 2001 before rising to $1.64 in 2008. Today it is around $1.22.

As a result of this instability -- most of which can be blamed on the dollar's excessive strength until 2003, then it's sharp drop until 2008 -- Europe's economy has been battered.

Sixteen months ago, Mundell noted that because of the euro's recent strength against the dollar, Europe's near-term export position had been hampered, damaging its economy. Moreover, the euro's strength would tip the currency zone into a deflationary position, raising the cost of debt and threatening bank solvency.

He suggested --- again, more than a year ago -- that the euro would fall, and hoped it would settle around $1.20, which he felt would fix most of Europe's major economic problems.

Bear all this in mind when reading commentary that says the euro's plunge is a sign of crisis and that the European Common Market experiment is a failure.

3 comments:

  1. Well one thing for sure is that Mundell isn't trying to blame Obama and if anything is putting the blame squarely on W. Bush where it belongs. No problem with that one!

    Then he sinks to the depths of depravity and stupidity by suggesting that the tax rates should be dropped to 15% from 35%! God, will the supplysiders ever learn anything? Not Mundell I think because he really is starting to smell like Reagan when he was befell with senility.

    ReplyDelete
  2. I assume you continued to pay taxes during the 2000s at the old Clinton-era rates?

    ReplyDelete
  3. Obama has nothing to do with state of economy or value of a dollar or health reform, which 2500 pages he could not possible write. Just want to remind everyone that we are at war since Iraq war; we are extremely "resilient" service oriented economy. What we forgot about is that all of that we can do because world around us gives us credit. At some point that credit will be stopped. But unfortunately it will happen same way as investor stopped buying american mortgages. When this will happen, and US will have to adjust, only than we can see what is the fair value of the dollar. For now we watch shows on TV and ignoring Obamas
    's and Greenspan's warning that USA is not producing enough engineers.

    ReplyDelete