Thursday, February 04, 2010

On the Difficulties of Large Economies

Following the news about the efforts of Greece to get their economy back on its feet, while not violating the terms of their EU membership (brief post on Greece here) it strikes me that the EU countries are experiencing a new and awkward version of what has afflicted various regions of the US over the years, namely, belonging to a country large enough it does not necessarily pursue policies best suited to the region.

Greece is in the uncomfortable situation of trying to reduce its massive deficit, while suffering a major recession. However, since it is part of the EU, it can't manipulate interest rates, pursue inflation, etc. in order to try to ease its problems. It's stuck raising taxes and cutting spending simultaneously (something no one has had the political will to do in the US in many a year) while in the midst of a recession. However, other larger countries (Germany, France, etc.) who are not suffering the same problems as Greece have more say on issues like the value of the Euro and interest rates, and so Greece is stuck taking the harder path as a particularly afflicted region of the EU.

The EU, as a whole, is of similar size to the US, and if you think about it, there have over the years been regions of the US which would, left to themselves, probably have benefited from pursuing different economic policies than the US as a whole. On the flip side, sometimes strong regional interests succeed in pulling the whole US into a policy which primarily benefits only on region (farm subsides benefiting the Midwest, auto bailout for Michigan and the Great Lakes region, etc.) I imagine that if each state had its own currency, its own national bank, and complete discretion as regards sovereign debt, you'd see the Great Lakes region pursing very different policies from the South; New York pursuing very different banking policies than the West Coast; the Midwest pursing different agricultural trade policies than the rest of the regions, etc.

1 comment:

  1. Well, that's what we saw during the Civil War. The south had a mostly agrarian economy which benefitted hugely from slave labor. The north had an industrial economy that didn't.

    Lincoln decided that the benefits of keeping the Union together outweighed the costs of the war, in spite of the huge regional differences of opinion about how to run the economy.

    Joel

    P.S. Yes, for this particular discussion I'm viewing slavery as a purely economic issue. Please don't accuse me of not seeing a moral issue in it as well.

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