Tuesday, May 10, 2011

Please explain economics to me

So the Euro has been adopted by countries with very different economies. Some – like Ireland, Greece and Portugal – are in a bad way and need massive bailouts. Others, like Germany, aren’t doing so badly.

But because the Euro includes the weak economies too, its value has fallen (CHECK). And that means that Germany, which exports a lot of high tech stuff to the rest of the world, now does well because its currency is cheap to non-Euro countries (CHECK).

Meanwhile Britain has adopted austerity measures to sort out its public finances, and that reassures the markets. It’s not going to be another Greece, and so its currency rises in value (CHECK). And that means that British exports suffer because they’re expensive (CHECK).

Then there’s the USA, which isn’t really interested in getting its public finances in order. So the markets realise it could be a bit like Greece, and everyone sells dollars. So the value of the dollar falls (CHECK).

Yup. Nothing really fits.

But tell me this: supposing…

- The Euro had fallen in value

- German exports only did well under a cheaper Euro

- Sterling rose in value as the government tackled the deficit

- British exports were doing badly

- The dollar fell because market were worried about US public finances

…then you can bet your bottom dollar everything would be explained by the economic theories above.

Doesn’t what's actually happening show that economics is little more than a kind of folklore which just happens to fit some scenarios better than others?

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