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December 3, 2004
More on the Euro
Tyler Cowen quotes The Economist. Yeah, The Economist is banging the gong on the dollar again. I sense a theme developing.
Anyway, here's Prof. Cowen's take:
My (cautious) take: The Euro area is rich in accumulated bank accounts but running a massive long-run deficit, most of all on human capital. Plus what will happen when countries start rejecting the EU constitution in their referenda? And don't currency markets have some tendency to long-run mean reversion, suggesting the dollar will make a comeback someday? So I say no, the Euro will not become the world's reserve currency. That being said, every prediction I have made about the Euro has been wrong to date. I said it wouldn't happen, it can't last long, and it won't rise in value. That is 0-3, must I now step away from the plate?
Right on. As for his predictions, I suddenly feel a little better about being off on today's job market numbers. But seriously, I understand his skepticism of the euro. I have felt for a long time that Europe is not an optimal currency area, at least not now. Just look at the disparity between the former East and West Germany. Read this if you have any doubts. Add a few more former communist countries into the mix and you've got a recipe for trouble.
And yet, the euro is rising like a hot air balloon. That said, I think the dollar probably will drop further before going up, maybe sometime mid to late 2005. A year of growth in the US together with uncertainty about Europe's economic future will bring about the mean reversion to which Prof. Cowen refers.
In the meantime, brace yourself for more articles like the one in this week's issue of The Economist. I hope I'm right about this one and that Tyler improves his record to 1 out of 4.
Posted by William Polley at December 3, 2004 1:36 PM