Don't Count the Euro Out Yet

Rumors of the euro's demise are greatly exaggerated, said Jim Adams, Arthur F. Thurnau Professor at the University of Michigan, in a keynote speech titled How Fragile Is the Euro?

John Rekenthaler 06 July, 2012 | 0:00
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Rumors of the euro's demise are greatly exaggerated, said Jim Adams, Arthur F. Thurnau Professor at the University of Michigan, in a keynote speech titled How Fragile Is the Euro?

It's easy to think otherwise following English-speaking experts. Adams pointed out that even though U.S. and U.K. economists of different political stripes diverge widely on many economic issues, they are mostly united about the euro--that it is "an idea whose time has not yet come." The Anglo-Saxon view relies on Optimal Currency Area Theory, which states that for a currency to function successfully, at least one of three conditions must exist. Economic migration must be free and easy, there must be a large central body that can execute fiscal transfers, and/or prices must be able to be adjusted downward quickly.

None of these three conditions holds true in Europe. Although people with a European passport can move into other countries, language and cultural barriers prevent migration from occurring at anywhere the rate that is needed to adjust economies that are moving at different speeds. It is not as if hundreds of thousands of Greeks are flowing into Germany. As for fiscal transfers, the European Union central body in Brussels is a minnow, comparatively speaking. It lacks the budget to effect major change. Finally, wages during downturns are sticky in Europe just as they are everywhere else. People are unwilling to take large pay cuts if their country's economy is struggling.

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John Rekenthaler  is vice president of research for Morningstar.

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