Sunday 21 July 2013

More reasons to worry (Kenen-Mundell edition)

about the Euro, in case you needed them. If countries suffering negative shocks see their young leaving for greener pastures, there is nobody left to pay the debts. Frances Coppola has some good info on this; Paul Krugman spells out the implications for optimum currency area theory. You could add a related wrinkle -- as a country's finances suffer, and tax rates go up, the mobile part of the labor force calls it quits. From anecdotal evidence, there has been a huge outflow from the expat community in Spain, and near-confiscatory taxation (as well as lousy demand conditions) has a lot to do with it. Which is another way of saying that fiscal integration may be the only answer (other than a LOT of trade). 

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