With the PBoC's currency announcement on Saturday and the surge (!) in the value of RMB last Monday (all very kindly timed to add zest to my meetings last week in Boston, New York, and Washington), you would assume that this entry would be all about the RMB and the effect of the PBoC announcement. But aside from a brief aside to say that I am a little skeptical that this announcement adds up to much beyond a desire to head off China-bashing at the G20 meeting – bad news for Germany, who will now have to absorb much of the heat – I plan instead to discuss what I think the history of sovereign debt crises might tell us about the recent events in Europe.
The Greek crisis may in many ways seem unprecedented, but of course it isn't. I think by now everyone already knows that Greece has spent much of the past 200 years – more than half by some counts – in default or in one form or another of debt restructuring, but in fact there are plenty of other periods of sovereign default and restructuring that can tell us something about what is happening and what will happen. I would suggest that there at least five things we can "predict" with some degree of confidence from looking at historical precedents:
1. The euro will not survive in its current form.
We should always have been skeptical about the survivability of the euro. There is a history of currency unions from which we can draw two reasonable conclusions. First, without fiscal integration such as occurred in the US after the Civil War or in the German Customs Union under Prussian dominance, currency unions are no more permanent than other forms of monetary integration, such as adherence to gold or silver standards.
Without robust mechanisms to absorb imbalances that emerge in different parts of the economy, and Europe embodies many very different economies, countries normally are forced to rely on monetary adjustment. The European currency union eliminates this type of adjustment mechanism, leaving countries with only two, brutally difficult options for adjustment besides opting out – sovereign default or long periods of deflation and unemployment.
So along with very high levels of capital mobility (which Europe possesses to some extent) and labor mobility (of which it has much less), Europe also needed to assign a substantial amount…
