Sketches of Spain
Sorry, couldn't resist using the name of a great Miles Davis-Gil Evans record as my title, given that I'm on my way there.
Nancy and I leave today for a week and a half in Spain to visit our son, Carl, whose two blogs about the Spanish football experience you’ve been reading, I’m sure. His team, the Valencia FIrebats, lost the Spanish championship last week – lost it by five scores, truth be told – and that well could be the last game of his football career, win or lose .
But beyond an exciting trip and a chance to see my kid, who’s been gone since January, I’m also very excited about the Euro being down to $1.23, making our timing excellent. I’ve had some exciting economic adventures in Europe, starting with being in London on August 15, 1971, when the convertability of gold was ended and the dollar set loose from the fixed exchange rate regime. I spent the evening in a pub watching the local TV commentators bemoaning how the Americans were solving their problem off of British backs, and was impressed that my classroom training has not prepared me for the real experience of markets. Nor could imagine that I would get married exactly ten years later to the day, making ours one of the few weddings where the phrase "closing of the gold window" was heard in the toasts.
Which brings me around to events in Europe. It will be interesting to see what 20 percent unemployment looks like in Spain – they’re about there right now. As I hear it from Carl, it hits the ground as an extended adolescence – young people can’t find work, can’t move out, can’t start families, and so on, and you can see how an economic crisis such as theirs ends up having demographic and cultural echoes that reverberate for a generation.
And I wonder what people there think about staying in the Eurozone. I wouldn’t be surprised if “el hombre sur la calle” thought of the disciplines demanded by the Euro as a tyranny and wanted to bolt. After all, countries in Spain’s kind of trouble – high unemployment, big debts, and so on – traditionally let their currencies depreciate which solves the problem in rough-and-ready fashion. Prices rise, real wages fall, and exports increase, all of which act together to lower the standard of living, which solves the problem, however brutally.
Being in the Eurozone, however, makes that impossible. The value of the currency Spain uses isn’t determined by events in Spain, that’s really the central problem.
Think of it this way. Spain and Ireland and Belgium and all them-there countries use the same currency. So do Alabama and Maine and Wyoming. And when Alabama, Maine, and Wyoming have problems, they can’t manipulate their currencies, either. But, unlike Spain, and like most, but not all, Americans, people in Alabama, Maine, and all the other states agree and accept that they will share the costs of economic adjustment with each other, which is what allows the 50 states to use the same currency.
This was not an easy decision for the 50 states. When you get right down to it, the Civil war was fought to create those conditions. Because when entities agree to use the same currency, they essentially agree to one of two conditions – either their productivity levels will all grow at similar rates, or they will allow their populations to migrate from low-productivity to high-productivity areas.
When economic conditions get bad, people move – it’s a fundamental but often overlooked fact of economic life. The “Massachusetts Miracle” that was alleged to occur under Governor Mike Dukakis has much to do with hundreds of thousands of their citizens leaving the state in the 1970s. More Californians left their home state for the other 49 in the early 1990s than left East Germany for West Germany where, again, unification with productivity differentials meant migration. The migration of millions of Black workers from the South to the North in the first part of the twentieth century – “Exodus with pork chops instead of matzoh,” as Dick Gregory said – was a similar experience. So was the depopulation of the Dust Bowl.
But Europe is not there. In-migration from the Third World is part of Europe’s economy, but cross-border migration is not, certainly not on the American scale. And freer trade in goods and services and easier movement of capital has not closed up productivity differentials. So any one country in the Eurozone – starting with Greece, Spain, Portugal, and Ireland – has to tough it out.
What’s going on in Europe brings to mind one of my many public mistakes – I’m famous among many friends for a lifetime of bad calls, from Fed Chairman Preston Martin to Presidents John Glenn and Gary Hart. One of the more esoteric ones concerned the imminent success of the Eurozone and the growing trend towards dollarization – smaller countries such as Ecuador abandoning their own currencies and using the dollar, simply to force themselves to grow their productivity as quickly as does the United States.
Ten years ago, I did an NPR commentary on the topic, which I’ve printed elsewhere on this blog. It argued, in essence, that as the Euro succeeded and more economic functions moved from European capitals to Brussels, Europe’s countries would have “less to do,” and were ripe for dissolution. And as I said then:
As global economic integration unavoidably leads countries to become part of currency blocs and free trade areas, countries will find it harder to define their purpose. Belgium, for example, once had its own currency and its own economic policies. As those functions rapidly shift towards the European Union, Belgium will become less a country than a bunch of Flemings and Walloons who don’t like each other. Spain, with its unhappy Catalans and Basques, is also a candidate for dissolution. And if these disaffected areas don’t print their own money, don’t restrict trade, and don’t run Soviet-style border checkpoints, who’s really going to care?
And so, Ecuador's dollar policy leads to a paradox: global economic integration, with its common money and shared rules, will leave us with a world of more countries, not fewer, ethnic ministates that subscribe to basic global economic etiquette and can then go about doing the important business of dancing their national dance and taking their national hero's birthday off.
Hail, hail Fredonia, land of the brave and free.
Well, it’s brilliant writing and high-altitude theorizing, but it has the collateral disadvantage of being dead-ass wrong. What I missed was that all the integration going on around us demands that we either reach some convergence of growth rates or accept mass migration as part of the adjustment. Spaniards apparently have no interest in leaving – they’d rather sit home with Mom and Dad and postpone life for a while. I can’t say I blame them. But absent migration and currency revaluations, the only thing that will fix places like Spain is an awfully long amount of time.
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Hail, Hail Fredonia
Ecuador’s having one of those globalization moments: its President tried to replace his country’s local currency with the U.S. dollar last month. That set in motion both a military coup and a debate over the virtues of adopting the dollar in daily use outside the United States.
Is it really time for Ecuadorans to pass the buck?
Anyone who’s gone shopping in Third World tourist havens, or reads about Russian gangsters who like hundred dollar bills so much they print their own, knows that the dollar is welcome all around the world. But developing countries like having their own currencies. After all, when a government prints money, it makes money: you slap a few numbers and the picture of a national hero on a piece of paper, and suddenly it’s worth something. Not a bad deal.
That is, until people lose faith in it. If the world lacks faith in your currency, no one’s going to accept it to pay for goods or repay loans, and suddenly you can't do either. So places such as Ecuador — and Hong Kong and Argentina and now perhaps East Timor — are deciding either to tie their currency to the dollar permanently or simply use dollars instead of local paper. No more speculative attacks on their currency, no more printshop money shenanigans. In essence, Ecuador’s making the world a promise — either we’ll stay as productive as the U.S., or we’ll tighten our belts until you can’t tell the difference. Good luck to them.
But this goes beyond money: it tells us something about Ecuador’s place in today’s world. I mean no offense — Ecuador’s a dandy little country. But countries have two purposes — to provide an acceptable standard of living, and to reflect shared ethnic or cultural premises. And as it loses its ability to shape its economy, Ecuador is quickly becoming no more than a cultural emblem of what Ecuadorans share.
And that’s the issue. As global economic integration unavoidably leads countries to become part of currency blocs and free trade areas, countries will find it harder to define their purpose. Belgium, for example, once had its own currency and its own economic policies. As those functions rapidly shift towards the European Union, Belgium will become less a country than a bunch of Flemings and Walloons who don’t like each other. Spain, with its unhappy Catalans and Basques, is also a candidate for dissolution. And if these disaffected areas don’t print their own money, don’t restrict trade, and don’t run Soviet-style border checkpoints, who’s really going to care?
And so, Ecuador's dollar policy leads to a paradox: global economic integration, with its common money and shared rules, will leave us with a world of more countries, not fewer, ethnic ministates that subscribe to basic global economic etiquette and can then go about doing the important business of dancing their national dance and taking their national hero's birthday off.
Hail, hail Fredonia, land of the brave and free.