Column : Multiple equilibria

The global economy is poised in a delicate state. It is in some sort of transition but it is difficult to say what sort of equilibrium it will end up in. There are multiple equilibria possible and where we end up could be determined as much by some random shock as systematic trends.

Consider this. The western economies have slipped down from their dynamic path of 1992-2007. The eurozone is struggling not to break up or to mire itself into stagnation for the foreseeable future. It has plans such as a fiscal union and a banking union, which, if implemented, can allow it to grow again. Most likely outcome at present seems to be stagnation unless the stronger northern members of the eurozone can fork out the resources to bankroll the deficit countries. The harsh adjustments going on in Ireland, Spain, Portugal and Greece are proceeding at various paces but they all are slimming down not growing.

The Maastricht Treaty was signed by many European Union members without realising that they were signing up to a denationalised currency, which was one of Hayek’s most radical proposals. The euro cannot be created by the governments as the European Central Bank (ECB) cannot buy sovereign debt in the primary market. The consequences of this were not felt while excess savings from Asia were keeping interest rates low. A denationalised currency is like the Gold Standard. For a

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