The flexibility argument is powerful–no doubt. And it is the default I would use in any cost-benefit analysis. However, I think the all answers lie in the deeper political economy. What can the peripheral countries in Europe get out of the EU without the Euro? What will they lose out on or find themselves needing to confront if outside the Eurozone?
Spain was more or less an economic backwater prior to 1993 when the pathway to the Euro was committed to with renewed vigor. When I was at the BDE in 2003/2004, all the renovation and renewal of Madrid and the freeways/trainlines around it came from Franco-German finance. Will the move back to the peseta lead to the kind of central bank non-independence that characterized pre-EMS/Euro Spain? WIll it lead to Spain reviving old inefficiencies that will come with purely sovereign approaches to monetary policy?
More structurally, what will happen to EU integration projects many of which assumed a seamless European Common Market? And this is Spain…what of Portugal and Greece, traditionally thought of as the worst candidates for entry to the EU on just about any issue?
These are the questions underlying the question of the Euro. They are not so easy to answer, far harder than the argument for macro flexibility which I agree is robust in a narrow sense of “all else equal.”
My opinion? Honestly, I cannot say offhand. It would take a good deal of raw data gathering on the hypothetical of a return to the local currencies. I would imagine, however, that the answer will vary country to country, Mostly, adoption of the Euro as a framework underpins a kind of European integration that is highly exogenous to many countries.
Greece ain’t Germany and never will be. It is Greek and many Greeks want to remain Greek (just with an unlimited credit line to Germany and France!). And politically, they have showed time and time again, they prefer to remain Greek. Other countries, Italy and Spain being the two clear examples, are countries with distinctly proud European heritage. They would find it appalling that they would not be included in any important European undertaking. So reforms needed to remain in the Eurozone might be worth the inflexibility.
What I found in my research for work on currency cooperation and coordination for the ASEAN+3 is that most economists in Asian governments have an extremely aged view of exchange rate economics–almost entirely as exogenous to the underlying economy. Makes sense since most high level economists at the central banks and finance ministeries are older and thus older trained, missing completely the microfoundations revolution.
On the flipside, most political overseers have weak backgrounds in economics, largely undergraduate or existential, seeing well trained economists as purely govt tools and economics as something more akin to opinion. Sadly, the combination of both meet head on in the discussion on monetary coordination and the single currency. Though more outwardly sophisticated in both respects, the same collision occurs in Europe.
As in the US’s macroeconomic woes, the headline economic questions, all else equal, are pretty straightforward…almost simple. However, the political questions which address the current and future structure and political economy of nations are not. For more than one vision is found therein. And the optimal monetary policy path for each vision is not only going to be different but is likely to be dramatically different and often without overlap.
On a final point, Singapore provides the opposite example to the flexibility argument in the political sense. The political underpinning of flexibility is that underlying differences in economic structure and political economy require that countries retain sovereignty over their own currency and therefore the ability to adjust exchange rates and intetnterest rates in a manner they see fit.
In Singapore’s case, the exercise went very differently. They asked, “if we wish to build a certain kind of society, what kind of monetary policy (and other policies and institutions for that matter) would be optimal? We will then make the hard policy decisions taking as given this optimal policy path in order to restructure our society.
Few papers in the economic literature of the West take this approach, as have we largely eschewed evolutionary growth models for models in which structure is static. So in Singapore, instead of the Calvo-MIshkin world of optimal exchange rate policies are endogenous to underlying economic structure (and political economy), we have the LKY/National Socialist model of economic structure being endogenous to the “national vision” and the political array that will carry that out.
I tend to think most of us carries within us libertarian, socialist, and fascist DNA. The questions before European countries are (a) to what extent they wish to transform structurally and culturally according to their visions of the future and (b) what price they are willing to pay for (a). Only then can we go and determine monetary policy optimality and with it how flexibility within the Eurozone stacks up against all the other political and structural factors involved.