Currencies

Currency Pegging Pedantics

By, 05/16/2007

Just about everyday, in some form or another, we rant about the importance of free markets. Yesterday we linked to a story in the Wall Street Journal about the Baltic States' problems integrating into the euro zone. And the more we think about it, the more troubling the situation becomes. Perhaps its time to revisit the issue of the strangling burdens the European Union places upon members of the euro club.

The Baltic States (Estonia, Latvia, and Lithuania) are the great success stories of post-communist Russia. Tremendous free market initiatives, including flat taxes and free trade, have sparked a new era of growth and prosperity. Here's a brief economic history of the area:

Estonia and Georgia: from Common Grievances to Shared Visions
By Editorial Staff, The Georgian Times
http://www.geotimes.ge/index.php?m=home&newsid=4374

They've done so well, in fact, the Baltics are now "worthy" of joining Europe's esteemed euro club. A dubious distinction indeed! The price for admission into the chic euro society is very steep. For a rundown of the "criteria" each state must meet in order to join the club, read here:

Eurozone hopefuls Cyprus, Malta must work on deficits, debt, ECB says
By Editorial Staff, EU Business
http://www.eubusiness.com/news_live/1179313213.44

In particular, we don't much like the idea of pegging a local currency to another. And perils abound for the fledgling Baltic States as they grapple with the EU's mandates:

Euro-Zone Rules Play Part In Jeopardizing Baltics' Gains
By Joellen Perry, The Wall Street Journal (*site requires registration)
http://online.wsj.com/article/SB117918669966902603.html?mod=hps_europe_inside_today

Currency pegging, budget deficit requirements, inflation requirements…is this a union or a fiscal and monetary policy Gestapo? The Baltic States essentially must forgo a big chunk of their tremendous prosperity for the privilege of joining the euro. As a result, their ability to stave off inflation, control the monetary base, and many other necessary fiscal and central banking functions is hugely impaired. It's enough to make you think twice about joining the euro—precisely what the United Kingdom has done over the last decade. (And much to the aid of their continual prosperity, we might add.)

The idea of the euro in itself isn't necessarily a bad thing. In the very long run, there is probably something to be said for a unified currency in a very fragmented Europe. But why create draconian requirements tethering high growth nations to a generally lumbering mainland Europe?

The whole idea creates a vicious cycle of mercantilism—the government increasingly must step in and hit "targets" for various metrics instead of allowing free markets to do their thing. Why not simply allow markets to decide for themselves?

True, right now the Baltic states are a very small piece of the global pie, and very unlikely to negatively affect global stocks or the economy today. But their struggles highlight bigger problems the EU has sewn.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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