Britain: Not That Smart

     Yesterday, I made the point that looking at the mess that is the Euro Zone, Britain looks pretty smart right about now, particularly the Europhobes who wouldn't let Britain join the Euro currency. This is true because of Krugman's Rubicon Effect:

      "the proposition that countries without a printing press are subject to self-fulfilling crises in a way that nations that still have a currency of their own are not. The point is that fears of default, by driving up interest costs, can themselves trigger default — and that because there’s a crossing-the-Rubicon aspect to default, once a country crosses that line it will probably impose fairly severe losses on creditors. A country with its own currency isn’t in the same position: even if it is pushed into some inflation, there’s no red line that need be crossed."

      http://krugman.blogs.nytimes.com/2011/08/17/the-printing-press-mystery/

    When I spoke about this yesterday I wasn't aware about Krugman calling it the Rubicon effect. Here is the original post which I called "Making Britain Look Smart."

    http://diaryofarepublicanhater.blogspot.com/2011/11/eurozone-making-britain-look-smart.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+DiaryOfARepublicanHater+%28Diary+of+a+Republican+Hater%29

    As it happens, however, Britain is not quite as smart as I made them sound. Or they are kind of smart-or at least are very lucky-they aren't stuck at the incompetent mercies of the ECB right now. But they are also not so smart in terms of the fact that they have nevertheless imposed Euro style austerity on themselves.

    http://krugman.blogs.nytimes.com/2011/08/17/the-printing-press-mystery/

    As Krugman points out they aren't Greece and yet are putting themselves in the same strait jacket. More generally, as Atonia Fatas puts it:

    "At the end of the day, default, taxes or seignorage are three ways to pay for the spending governments have already done. They are not that different conceptually. In a closed system there is no way to avoid grabbing resources from your own citizens – in some sense deciding between the three choices is simply a redistribution decision."

     But as Krugman points out, what he fails to consider is the " the implications for the euro crisis, for a couple of reasons, both of which have to do with the possibility of self-fulfilling expectations of default."

     Again because of Krugman's Printing Press Mystery. Britain therefore looks smart for not being in the Euro zone right now accept for the fact that it is not taking advantage of their better position, which suggests they don't know what their real advantage is, which suggest they are more lucky than smart. Arguably it is a catch 22 with the Europhobes in Britain or elsewhere. You can make the case that The Rubicon Effect shows they were right all along. Or you can argue that Britain's not so smart austerity shows that even if they were right they had the wrong reasons-ie, they didn't oppose it because they had the foresight to see that not having your own currency and printing press is a major self-willed handicap, but for other less impressive reasons, like narrow minded jingoism.

    If it weren't for the Europhiles you could argue that the Euro Zone would be more and better integrated and the structural deficiencies we see today in the EU wouldn't exist or be less prevalent. For the real problem is that this Eurocrisis has shown that the best value is not always in the Middle Path. Today the Eurozone needs either much greater integration or to disintegrate altogether. It was the forced compromise between the Europhobes and the Europhiles that has made is so weak. The Europhiles seemed to win-outside of Britain-yet the compromises they had to make with the Europhobes hamstrung the EU making it ineffective.