Hacker News Reader

Comment by theseatoms | Hacker News Reader

For those who are just catching up, I found the following article enlightening on the Greece situation:

http://www.pragcap.com/greece

..especially the following line: - The EMU is a single currency system just like the USA is. The reason the USA works and the EMU doesn’t is because the USA has a system of rebalancing whereby poor states get more federal funding than wealthy states.

View on HN

In the EU poorer states get more funding too. One line explanations for a fictive problem are most likely wrong.

The grandparent is basically right.

The Euro is flawed by design. Flow capitals works against the Euroarea. For instance:

The interest rate convenient for Germany is not the interest rate convenient for Spain. What do you think are the rates chosen by the Central European Bank? (clue: the ECB is in Frankfurt)

This shouldn't be more problem that the Fed rate affecting New York and Florida for instance, but there is not a common fiscal policy like in the States.

What happens is that capital in the banks of the north search bigger returns in hot economies (south countries) and create bubbles (Florida again?).

When the crisis arrive, we lend public money to (Greece for instance) so they can return the money to the (private) banks and, in a sleight of hand the fault is all of the lazy south Europeans.

(clue: the ECB is in Frankfurt)

Sure, physical location is paramount...

Let's count the members of the main decision-making group of the ECB, the Governing Council.

Two Germans. Twenty-three non-Germans.

Sure, physical location in Germany is just by chance..

"Let's count the members of the main decision-making group of the ECB, the Governing Council. Two Germans. Twenty-three non-Germans."

No, let's count hard data better.

Here, from a nobel prize: http://krugman.blogs.nytimes.com/2011/06/15/one-size-fits-on...

And here (a little dense maybe): "Overall, the concern that the ECB rate aligns more with the Taylor recommended rates of the core countries than with the peripheral countries appears to be supported by the data[..]" http://econ.berkeley.edu/sites/default/files/Srivangipuram.p...

Yes, because when California almost went bankrupt in 2012 all they had to do was call Pennsylvania, who then promptly wrote a check for 1/2 of California's GDP, and then said a few years later, when California still hadn't fixed its ridiculous retirement fund shortfalls, 'Nah you know what, you have nice beaches we visit every now and then, let's call it even.'

Oh no wait, they didn't - and the amount of federal funding even New Mexico gets is dwarfed (per GDP) by the deficit the Greeks were trying to roll over - again. How many US states fail to collect 25 to 40% (depending on what you count) of taxes? If there were any, how long do you think other states would keep that state afloat?

It isn't up to the individual states. The Feds can and do keep various states afloat through a variety of transfer institutions. Texas in the 1980s had to get a bailout of over 30% of its GDP due to the Savings and Loan crisis and resulting (ahem) debt forgiveness by the FDIC. New York certainly got a massive injection from the Central Bank during the fall of Long Term Capital Management. Mississippi and Alabama have been net benefitors from taxpayers in other states via entitlement programs for a generation now.

When California goes bankrupt the federal government spend more money in California. This is automatic. This doesn't happen in the Euro area. In fact, the opposite happens: Brussels force the country to spend less.

I think the system of rebalancing is a small factor, the major factor being a fiscal policy instated by the federal government on state spending...there needs to be a similar central entity in the Eurozone to implement not just momentary policy but also fiscal policy...but we all know this idea is unpopular

Reply on news.ycombinator.com