[p2p-research] Relative Price Levels in the Euro Area 1995-2009

[Ryan Lanham]

 If you use the same currency as me, we want prices to be trending the
same.  If there is deflation in one zone because of austerity, and inflation
in another zone because of excessive spending, then the currency is being
asked to do opposite things at once...be inflationary in one place, and
deflationary in another.  In the end, that means that those places where
prices stay low...e.g Germany, or now Ireland, subsidize those where people
keep spending (e.g. Greece, Spain and Italy).   It won't work in the long
run.

If Italy had lira, no big deal if they inflate and make currency less
valuable by spending money they don't have.  But if Germany is meanwhile
trying very hard to have a strong currency so that its people can buy Scotch
and Sony TVs for relatively few hours worked, it is very frustrating.

This is why it is typical to have one national policy framework (e.g. the
Fed or ECB) in a currency zone.  But if national governments operate
independently, it is hard for currency unions to be fair.  That is why,
throughout history, currency unions and voluntary systems have almost
universally failed.


On Tue, Jun 29, 2010 at 8:44 PM, Patrick Anderson <agnucius at gmail.com>wrote:

> Ryan wrote:
> > You can see the problem - over the last 15 years, costs on the
> > periphery escalated relative to the big core economies -
> > Germany and France.
> > Now the area is at risk of deflation - in particular in Ireland,
> > there was clear deflation in 2009.  (There's an interesting article
> > on the not-too-great effects of Ireland's austerity program in
> > this morning's NYT).
>
> Sorry if this is a stupid question, but I don't understand the goal.
>
> Do we want prices to be high, or do we want them low?
>
> Thanks,
> Patrick
>
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-- 
Ryan Lanham
rlanham1963 at gmail.com
Facebook: Ryan_Lanham
P.O. Box 633
Grand Cayman, KY1-1303
Cayman Islands
(345) 916-1712
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