The euro crisis continues, but the issues are not new. Already back in 2001 two of the most influential monetary economists ever debated the euro issue – and the question of fixed versus floating exchange rates. Milton Friedman represented the euro sceptic view, while Robert Mundell represented the pro euro view.
Both Milton Friedman and Robert Mundell have done fantastically insightful research on currency issues. Most notably Friedman already in 1950 presented “The Case for Flexible Exchange Rates”, while Mundell founded the theoretical foundation for the euro in “A theory of Optimum Currency Areas” in 1961.
The 2001 debate was originally printed in the Canadian magazine “OPTIONS POLITIQUES”. The article is available online. It is a real gem and I am still puzzled why the debate between these two giants of monetary theory has been so underreported.
I will not go through the entire debate, but let me just quote Milton Friedman:
“Will the euro contribute to political unity? Only, I believe, if it is economically successful; otherwise, it is more likely to engender political strife than political unity… Ireland requires at the moment a very different monetary policy than, say, Spain or Portugal. A flexible exchange rate would enable each of them to have the appropriate monetary policy. With a unified currency, they cannot. The alternative adjustment mechanisms are changes in internal prices and wages, movement of people and of capital. These are severely limited by differences in culture and by extensive government regulations, differing from country to country. If the residual flexibility is enough, or if the existence of the euro induces a major increase in flexibility, the euro will prosper. If not, as I fear is likely to be the case, over time, as the members of the euro experience a flow of asynchronous shocks, economic difficulties will emerge. Different governments will be subject to very different political pressures and these are bound to create political conflict, from which the European Central Bank cannot escape.”
Friedman died at an age of 94 in 2006. The euro outlived Friedman, but will it also outlive Robert Mundell?
