How do currency policies even work? Isn't it like the state forcing exporting and tourism companies to lower their prices (by devaluating the currency)? Why is that the states job instead of the individual companies'?

Also the state can scam buyers of state bonds by inflating the currency, which also has the sideeffect of meddling with it's own economy.

It's not a silver bullet, it's just different cancer.

"Isn't it like the state forcing exporting and tourism companies to lower their prices (by devaluating the currency)? Why is that the states job instead of the individual companies'?"

With a free-floating currency, prices for foreign buyers can change overnight. This can allow quick responses to shocks. In contrast, internal devaluation (deflation) is a very slow process (how do you coordinate everyone in a country to reduce their prices).

e.g. for the UK circa 2008 the economy had problems (more reliant on finance sector than most other countries) and the currency dropped, making UK exporters more competitive. Italy or Greece a few years later would have also seen their currencies fall, had they not been locked into the same currency as Germany. Instead, their exporters have problems with competitiveness which take many years to equilibrate (they must have lower inflation or deflation relative to Germany).

There is a subject called 'Optimum Currency Areas'. As always, there are tradeoffs, more homogeneous economic areas face this particular problem less and so are more likely to benefit from a single currency.

Thank you for the insights. Any thoughts on how it went down in Latvia, sometimes cited as a success story but also criticized [1]?

[1]: http://cepr.net/publications/reports/latvias-internal-devalu...

I am sorry, no. I do not have such expertise.

When I read economics textbooks, I see a marked contrast to physics textbooks. e.g. in physics, they might explain about a pendulum using equations etc, but then they show you real experimental data, to show that your equations about period vs pendulum length are correct. I have not found economics textbooks that do that.

The more basic thing that economics gives me is akin to this: when iron ships were first proposed, sceptics might say 'iron sinks, so iron ships are impossible, you are crazy'. You can answer this by putting an iron saucepan in the kitchen sink, and showing that it floats.

So (macro) economics can tell me some basic things about 'which way is up'. But putting even half-accurate numbers on things is difficult. imo economics is often done best when you view it using historical case studies + theory to know which way each effect acts.

This is not to say that what you ask is impossible, but when that is done (by experts, not me), it is not convincing enough to convince others that it is right.

> Instead, their exporters have problems with competitiveness which take many years to equilibrate (they must have lower inflation or deflation relative to Germany).

Then why don't they lower their prices? Why do they need to rely on a devaluating currency (which might come automatically from the market, or from the central bank actively buying foreign currency at high price)?

So, you need to lower all prices - i.e. as an exporter you ask your workers to take wage cuts, they must ask their landlords to reduce their rents, shopkeepers to reduce prices etc. This is a slow process (especially because many contracts run for a fixed period so cannot be changed until the next contract is signed).

Internal devaluation can be done, it is just a slow and painful process (usually including higher unemployment).

Currency devaluation happens automatically regardless of government intervention. Where did you get the idea that it's just a currency policy? Currency devaluation and appreciation are purely market driven depending on supply and demand. If you have two countries trading with each other and one of them has a surplus like the trade between Germany and Greece. Greece has to borrow money from Germany for a surplus to happen. The market automatically compensates for this. What happens is that the demand for the German currency shoots up and demand for the Greek currency goes down. This means that eventually German products are no longer affordable because the Greek currency has been devalued and Germany won't lend money to Greece anymore because they can't pay it back. This also means that suddenly Greek labor is much cheaper than German labor despite the productivity gap. Therefore there is now an incentive to start more Greek businesses.

Anyway the takeaway is that there is an upper bound to how much Greece can borrow from Germany before local industry becomes more cost effective. The goal is to trade as much as possible but to also support the local economy.

Now the same scenario with the Euro results in no appreciation or devaluation. Greece borrows money from Germany. The exchange rate doesn't change because it's the same currency. Greece's ability to repay the loan did not change but there is now no economic pressure to not lend money. Greece can lend as much as it wants and since German products are always more cost effective it will use that borrowed money to always buy German products. The local economy languishes and eventually Greece has borrowed so much that it can't pay off it's debt. Then all you need to do to finish off Greece is to launch some kind of austerity policy that decimates what little local economy has managed to survive.

There is no working solution for the problems a unified currency causes. The best thing that one could possibly do is to have transfer payments to cancel the surplus but there is no way to force people to spend that money in the local economy and there is still the perverse incentive to increase the surplus to get more transfer payments.

> Where did you get the idea that it's just a currency policy?

Not just, but it is.

E.g. Switzerland has actively tried for years to peg 1.20 CHF to 1 EUR, to ensure that exports would not be hurt by a strong CHF. ... Until it suddenly didn't anymore.

Very, very likely it's still secretly pegged. CHF:EUR is extremely stable although not much that was driving its appreciation fundamentally changed .

I also buy stuff and services frictionlessly being outside of the EZ. Why trade away your country's monetary sovereignity for the convenience of currency exchange? We all know what happened to Greece and to the Italian economy.

Monetary sovereignty is an ambiguous concept here in Africa. Many countries use the Dollar as acceptable forms of payment, and countries surrounding South Africa are susceptible to the strength of the Rand compared to say the Namibian Dollar, Botswana Pula or Zim Dollar.. So when many nation's already rely on a secondary currency, why have that currency be the Dollar? Make it a single currency, which works across borders (a major factor for Africans as many work in other countries and send money home) and begin to stabilise African economies together, rather than one at a time via the China/IMF's predatory loans.

I can understand this. But it doesn't have to be te sole currency. Give contries the option of either running their own currency or using a single AU currency both by participaring in the AU or using it unilaterally like Montenegro is using the Euro.

The Greece and Italian economies were mismanaged. The Euro, in and of itself, had little to do with it. At worst, it removed one tool for dealing with the mismanagement. Far better to manage it well in the first place.

Greece maybe. But if Italy's economy was mismanaged it was due to outside pressure.

https://www.ineteconomics.org/perspectives/blog/how-to-ruin-...

https://news.ycombinator.com/item?id=19649182

To put it into the words of my father (Italy early 90s), "the Euro will be good for us because our politicians will have to stop stealing". But they didn't and we kept voting for them. This is the problem in Italy. Internal, not external. Then other countries can take advantage of it, that's the way the world works.

> Until the early 1990s, Italy enjoyed decades of relatively robust economic growth

This is painting just one side of the story. Look up the graphs for debt as % of GDP in the same years.

Here they are:

https://tradingeconomics.com/italy/government-debt-to-gdp

https://2.bp.blogspot.com/-rj28mXbk6V8/TsEC58hZftI/AAAAAAAAA...

Sure, we were growing, but more than that we were growing our public debt. I'm no economist, but this doesn't seem the sign of a healthy economy to me.

Maybe the businesses in your country improve their conversion rates ever so slightly because of said convenience? We spend time and money to optimize for far sillier things in our funnels.

I do not claim to know the aggregate effects, but I would guess it is not as simple as convenience vs. sovereignity.

Not really. Visa and the banks do take a cut. But there is Revolut now if you want to give them the middle finger. They will be forced to adapt and offer similar services or at least non-ripoff exchange rates. I always prefer a free market solution to an EU buceaucratic solution. Such as EU mandated zero transaction fees in order to convert the bulk of the transactions to cashless, be able to track them and "prevent money laundering", which of course isn't true (eg. Danske bank scandal).

Devaluation is not a mere government tool, it's an automatic, market based mechanism of leveling the playing field between two countries.