Economic Paper of the Day: Buiter on the Baltics

Academics love to niggle over small differences. Willem Buiter is an academic, and today's he's writing on the difference between three very similar things, with respect to the currencies in the Baltic states and other small European countries:

A currency board, where the local currency has a fixed exchange rate with the euro;
Outright euroisation; and
A weird kind of halfway-house, whereby the euro becomes joint legal tender with the existing currency, and eventually becomes the de facto (but, crucially, not de jure) currency of the country in question.

Buiter has managed to write over 7,300 words on this subject, and I have to admit I'm having a lot of difficulty trying to think of any way to persuade you, my gentle reader, to click over and read them all. But really, you should, because his blog entry (really a polemical academic paper, complete with footnotes) is a model of an engaged, involved, and utterly persuasive economic essay.

The big-picture conclusion is that the Eurocrats are stupid hypocrites, and that it now behooves all Europeans to support the Baltic states in their quest for currency stability. Estonia, Latvia, and Lithuania can and should join the euro today – and thereby avoid becoming "rudderless playthings of the international capital markets" like New Zealand (or, I might add, Iceland). And if Brussels and Frankfurt don't want to play along – well, then, the Baltics should just go ahead and do the next best thing unilaterally (or, ideally, multilaterally, all at the same time, maybe with Bulgaria, too).

Being a small country with a small currency confers no benefits for anyone. It made perfect sense for Montenegro to simply adopt the euro as sole legal tender, and Montenegro is an economic basket-case in comparison to the Baltics. (In the Americas, Panama, El Salvador, and Ecuador have all made the equivalent decision, and there was nothing the US could do to stop them.) Yet the Baltics are barred from adopting the euro by arcane bureaucratic hurdles which make no logical or economic sense. Congratulations to Dr Buiter for putting their case so clearly and compellingly.

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