A clearinghouse for commentary on supply-side economics.
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.