FRIEDMAN FRIDAY Milton Friedman predicted that the euro would be a disaster and now we have Greece crisis!!!

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Milton Friedman predicted that the euro would be a disaster and now we have Greece crisis!!!

2 paragraphs that explain the Greek financial crisis

Greek membership in the euro has been a disaster, and Greek prime minister Alexis Tsipras has to figure out Greece’s next step.Milos Bicanski/Getty Images

Milton Friedman might be best known today for his free-market political views. But some of his most important contributions to economics were in monetary policy. He explained the high inflation rates of the 1970s, and he was also an early and influential advocate of the system of floating exchange rates that we have today.

So European policymakers would have done well to pay attention in 1997 when Friedman predicted that the euro would be a disaster. Eighteen years later, with Greece on the verge of a financial meltdown, his analysis looks prophetic:

Europe’s common market exemplifies a situation that is unfavorable to a common currency. It is composed of separate nations, whose residents speak different languages, have different customs, and have far greater loyalty and attachment to their own country than to the common market or to the idea of “Europe.” Despite being a free trade area, goods move less freely than in the United States, and so does capital.

The European Commission based in Brussels, indeed, spends a small fraction of the total spent by governments in the member countries. They, not the European Union’s bureaucracies, are the important political entities. Moreover, regulation of industrial and employment practices is more extensive than in the United States, and differs far more from country to country than from American state to American state. As a result, wages and prices in Europe are more rigid, and labor less mobile. In those circumstances, flexible exchange rates provide an extremely useful adjustment mechanism.

What Friedman means here is that if Greece still had the drachma, it could deal with its financial difficulties by devaluing the currency. A cheaper drachma would make Greek goods more attractive to foreigners, boosting exports and creating jobs. And a bit of inflation in Greece would help ease the country’s debt burden — not an ideal outcome, but better than the yearslong depression the country has suffered since the 2008 financial crisis.

It’s much harder for an unemployed man in Greece to move to get a job in Germany than it is for somebody who loses his job in Pennsylvania to find work in Texas. So Greece’s unemployment rate has stayed disastrously high, even as other eurozone nations have enjoyed a robust recovery.

Friedman concluded that the euro experiment would backfire:

The drive for the Euro has been motivated by politics not economics. The aim has been to link Germany and France so closely as to make a future European war impossible, and to set the stage for a federal United States of Europe. I believe that adoption of the Euro would have the opposite effect. It would exacerbate political tensions by converting divergent shocks that could have been readily accommodated by exchange rate changes into divisive political issues. Political unity can pave the way for monetary unity. Monetary unity imposed under unfavorable conditions will prove a barrier to the achievement of political unity.

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Milton Friedman’s Free to Choose (1980), episode 3 – Anatomy of a Crisis. part 1

“The Power of the Market” episode of Free to Choose in 1990 by Milton Friedman (Part 5)

Milton Friedman The Power of the Market 5-5 How can we have personal freedom without economic freedom? That is why I don’t understand why socialists who value individual freedoms want to take away our economic freedoms.  I wanted to share this info below with you from Milton Friedman who has influenced me greatly over the […]

“The Power of the Market” episode of Free to Choose in 1990 by Milton Friedman (Part 4)

Milton Friedman The Power of the Market 4-5 How can we have personal freedom without economic freedom? That is why I don’t understand why socialists who value individual freedoms want to take away our economic freedoms.  I wanted to share this info below with you from Milton Friedman who has influenced me greatly over the […]

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