I'm not a great defender of the Euro. I think it was a mistake. But there's one argument against the Euro that I'm not happy with. It goes something like this:
"Some of the Eurozone countries are just permanently less productive than others. The less productive countries just can't compete if they all share a common currency. They need their own devalued currency to be able to compete."
(I have a memory like a sieve, but I don't think I'm making that up, am I? Anyone got good examples?)
That's a problem (by assumption). But can having your own currency help alleviate the symptoms of that problem? Would sharing a common currency make the symptoms worse?
There's something in economics called the "Neutrality of Money". Most macroeconomists believe that money is (approximately) neutral in the long run, but not neutral in the short run.
The basic idea behind monetary neutrality is that the monetary units don't matter. If you add a zero to all the dollar bills, bank accounts, prices, and wages, and everything measured in dollars, nothing real is changed. If the economy was in equilibrium before the change, it will still be in equilibrium after the change. (And if it was in disequilibrium before the change it will be in exactly the same disequilibrium after the change too.) All things measured in dollar units will be 10 times as big as before, but anything measured in real units, like kilograms or litres, won't be affected.
This applies to an open economy just as much as a closed economy. You just have to remember that the exchange rate needs to be multiplied (or divided) by 10 as well, so it takes 10 times as many dollars to buy one unit of foreign money.
"Therefore", we are tempted to say, if you double the money supply this will simply double all prices and wages but won't affect output, employment, or anything else real. But of course we know (at least as far back as David Hume) that that isn't quite right. It takes time for some prices and wages to adjust. And a 30 year loan of money won't adjust at all, for 30 years. Money is definitely not neutral in the short run. And it's even possible that some of the effects from that short run non-neutrality might persist indefinitely, if the long run equilibrium is history-dependent. But mostly we assume long run neutrality is a reasonable approximation. You can't make a country permanently richer just by printing to make the stock of money permanently higher. You just make the money worth less.
The money is worth less in terms of goods, and it's worth less in terms of foreign money too. By the same proportions. So the real exchange rate, which is how many domestically-produced goods you have to sell per unit of foreign-produced goods, will be the same if money is neutral. A BMW will still cost the same number of tonnes of olives. Your exports are neither more nor less competitive in international markets.
And if the central bank sets the exchange rate, rather than setting the supply of money, it's all the same if money is neutral. Add a zero to the exchange rate, or add a zero to all the dollar bills; either one will lead to the other. Neither will make any difference to a country's ability to compete for sales of goods in international markets.
We can haggle over the exact long run neutrality of money. But I don't know of any economic theory that says the optimal money supply and price level is permanently higher (or lower) in a country with low productivity than in a country with high productivity.
Neutrality talks about the (non-) effects of a permanent change in the level of the money supply. Super-neutrality talks about the (non-) effects of a permanent change in the growth rate of the money supply. It says there will be no effects on real variables, and the only effect will be an equally higher inflation rate.
In an open economy, super-neutrality says the higher money growth rate and higher inflation rate will also mean a higher rate of depreciation of the exchange rate. The value of money is depreciating more rapidly against goods, and also against foreign money, so the real exchange rate is unaffected.
Super-neutrality is theoretically less likely to be true than neutrality. We know there will be some real effects. For example, inflation is a tax on holding currency, and people will respond to that tax by holding a smaller ratio of currency to income. And if it's costly to change prices, inflation means prices will need to be changed more frequently which may increase those costs. And it will distort relative prices if those price changes aren't synchronised. Etc. Many economists believe a little inflation can be a good thing (it keeps us further away from the Zero Lower Bound on nominal interest rates, for starters). But once you get into high single digits, nearly all believe inflation is a bad thing.
Could you argue that the optimal money growth rate, inflation rate, and rate of exchange rate depreciation, are higher in a country with lower productivity growth rate? Maybe, just maybe, but it's not obvious.
It might be, for example, that countries with lower productivity growth rates have lower equilibrium real interest rates. And need a slightly higher inflation rate to keep nominal interest rates high enough to safely escape the Zero Lower Bound.
It might be, for example, that countries with lower productivity growth rates have lower equilibrium growth rates of real wages. And need a slightly higher inflation rate to keep nominal wages growing to escape any zero lower bound on nominal wage growth.
Maybe. Maybe. But I don't think I've heard either of those arguments advanced.
All I hear is that the Club Med countries need permanently looser monetary policy to let them stay competitive in international markets. Which doesn't make any sense. Ability to sell your exports depends on the real exchange rate, not the nominal exchange rate. And if money is neutral, and superneutral, the real exchange rate will be unaffected in the long run by your monetary policy. So it doesn't matter if you have your own money or not.
In the short run it does of course matter. If different countries get hit by different temporary shocks (like right now), each would benefit from a different monetary policy. Because wages and prices can't adjust easily in the short run, while monetary policy can. And when you need your own lender of last resort (like right now) having your own tame central bank matters a lot too.
But in the long run? To help cope with some permanent Club Med syndrome? The "competitiveness" argument is no good. And I haven't seen a good argument.