The United States of Europe

While national parliaments in Europe are voting for the new Greek bailout, here’s an excellent counterfactual showing where Europe could be now if it had a real union:


That’s the summary of the choices that Europe made (and continues making) since at least 2000. If the year of 2009 explains itself with toxic assets and international shocks, the second dip is a European invention. It started with politicians denying the intention to bailout the indebted EU members. This ambiguity provoked the sovereign debt crisis in 2011-2012. The debt crisis, in turn, increased the cost of borrowing for the European countries that had to counteract high unemployment. Unable to do so, the periphery retained its 20-plus percent unemployment and the loss of output that followed.

To that the European Union responded in slow motion. The European Financial Stability Facility — the major vehicle of intra-EU bailouts created in 2010 — had been expanding constantly in response to the deteriorating situation in indebted economies. But actions took place only after the bad things had happened.

Now take the United States, which settled its major debt issues via the TARP in 2008-2009. More importantly, it was the federal government that paid $700 bn for this program. The American states didn’t waste time figuring out which state government was unacceptably immoral and, therefore, should have been reformed. In a hypothetical scenario, they could. The poorest American states have only a half of output per capita produced by the richest states. Also, the recovery was uneven:


Secondly, the US had the Fed that provided liquidity regardless of the bank’s state of origin. Meanwhile, as the first figure reminds, the ECB-led eurozone performed worse than the EU on average (and much worse compared to the nine EU countries that retained their national currencies).

This problem is much bigger than the Greek case alone. With Greece, European politicians ignore the most respected macroeconomic experts making reasonable arguments. But these politicians are not supposed to listen to the reason, if by reason we understand the wellbeing of an average European. Merkel and Schauble are accountable to the German voter, not to the Greeks. And the German voter is fine with paying nothing to Greece. He can continue enjoying low unemployment at home — even if this became possible thanks to the euro weakened by the indebted EU members.


Paul Krugman shows the divergence between Sweden and Finland. Finland is a eurozone member lagging behind Sweden, with an overall picture similar to the first figure here.

Bitcoin and virtual currencies reports about half a thousand companies dealing with virtual currencies. CruchBase mentions 17 startups related to Bitcoin alone. Bitcoin was around for five years and attracted attention of the IT community, less of brick-and-mortar sellers and no attention of the finance industry. So, why not?

Critics’ key point about the bitcoin is: it’s not a currency. The plots by David Yermak:

The bitcoin’s value increases over time. Great. You become richer while not spending bitcoins. Hence, very few intend to pay for things in bitcoins. Meanwhile, everyone is glad to accept bitcoins over dollars. And that’s why some sellers integrated bitcoin transactions. They welcome payments in the asset whose value grows effortlessly. Especially if buyers make no adjustments for the deflation and overpay in bitcoins.

Volatility reflects risks, and the bitcoin happens to be a volatility champion among assets. Real prices nominated in fixed bitcoins fluctuate much over very short periods of time. When you have large margins or small number of transactions in bitcoins, it may not hurt. But most retailers are sensible to price changes and have to hedge the risks of even not-so-volatile currencies. Can they hedge bitcoins? Apparently, no:

Well, you don’t even know what asset you should buy to protect your bitcoin holding from sudden movements.

The bitcoin may have something like the Federal Open Market Committee to maintain the exchange rate against the basket of traditional currencies. But the supply of bitcoins is restricted by design, so you can’t treat it like normal money and create inflation of about 1-2% a year. At best, such a committee could avoid excessive volatility if it had sufficient volume of bitcoins under control. Then market participants would form correct expectations about the rate of deflation and would discount prices accordingly. This hypothetical central committee goes against the ideology behind the bitcoin, though.

Is it possible to design a decentralized currency that can smooth its own exchange rate movements? That’s an interesting exercise about managing the monetary base in a particular way. Injecting more money doesn’t move the consumer price level (or exchange rates) by itself. For example, the Fed’s quantitative easing after 2008 didn’t create inflation for non-financial assets also because other financial institutions preferred keeping money to spending it. You’ll need helicopter money drops for deflation, at least.

That’s just a hypothetical solution. Being centralized in terms of both capacities and responsibilities, any central bank is a major stakeholder for its own currency. Along with a national government, the bank is responsible for making its currency suitable for transactions and economic stability, insofar as monetary policies work. The bitcoin is an asset without a central bank. You have no stakeholder who cares about deflation and volatility. People outside the bitcoin community care little because, unlike the dollar, the bitcoin has no impact on the rest of the economy. And current holders of bitcoins must like the idea of ever-increasing value of their assets. All this hurts the bitcoin and similar virtual currencies at large.