Diverse economies can only be protected by a diverse range of monetary policies

Proposition’s faith in the approach it sets out is understandable. It has been followed successfully by China for the last decade. China has been able to grow and manage its economy by providing cheap exports because it had a ready supply of exports to provide – everything from agricultural goods to electronics to coal, metals and rare earths. However, the success of a policy of devaluation and interventionist monetary strategies is dependent on an economy’s ability to produce goods and service. Depressing the value of a currency will not reform a defective, underdeveloped or poorly regulated economy – this is a problem that is better dealt with by fiscal policy, rather than monetary policy. Monetary policy cannot revive a moribund economy that is unable to export in-demand goods and commodities. Over the past ten years, the financial success of many struggling Eurozone members has been based on housing bubbles and intensive investment by foreign banks. These patterns of investment have served to mask educational crises and failing labour markets within Eurozone states such as Greece, Spain, Ireland and Italy. Cash injected into the economy of Greece, or any other former Eurozone member confronting high levels of sovereign debt and deficient and unproductive national economies is likely to remain in domestic markets, rather than being bought up by exporters. Exporters, after all, are not interest in purchasing Greek goods. Both Portugal and Ireland are too small to have active export economies, and Italian machinery and garment manufacturers are rapidly losing business to Chinese competitors. What will abandoning the single currency mean for Eurozone states experiencing monetary crises? Excessive quantities of weak state’s currency will become trapped within their economies. An increased supply of money will drive up prices on domestic commodities reducing the overall standard of living among the population. This constitutes a specific harm far, far greater than the comparatively mild increases in tax burdens and the minimum retirement age that the austerity measure imposed under the status quo are set to create. Side proposition have also portrayed the costs associated with breaking up the Eurozone as minimal. They have claimed that expenses incurred in printing new currency, recalibrating cash machines and computer systems will be easily borne by former members of the Eurozone. Nothing could be further from the truth. In every former Eurozone country, the small changes that would need to be made to payment systems, computer software and retail infrastructure in order to cope with transition would be so numerous as to be ruinously expensive. A study by the bank UBS, reported in the Economist, notes that the costs that would be incurred by Germany if it were to leave the euro would be equivalent to 25% of its GDP. If only Greece were forced to depart from the Euro, the initial transaction costs associated with returning to the drachma would be equal to 50% of GDP. Greece would also have to bare annual costs associated with debt repayment and devaluation equivalent to 15% of GDP.[i] [i] The Economist, ‘After the fall’, 17 September 2011, http://www.economist.com/node/21529046