Robert Mundell: Godfather of the Euro
- Mike Raposo
Robert Mundell was an accomplished scholar, famous economist, and the “Godfather” of the euro. From his beginnings in Kingston, Ontario, to a man who would pioneer the work of the Optimum currency area theory which would lead into the creation of the euro; Mundell has lived the life most dare not dream of.
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The creation of the euro is one outcome of Mundell’s work. Overall, there is nothing wrong with Mundell’s theory that a group of countries centralized in one geographical area could adopt a single currency; it is the aspect of already prosperous countries taking on the same currency as not so prosperous countries, creating a debt crisis. Most underdeveloped countries cannot grow due to frivolous government spending, wage increases, and government mandated benefits. If these issues are not corrected, Europe could be in worse trouble than it already is.
One solution to bringing Europe back to prosperity is to let the euro run its course. If the countries who adopted the euro give it some time, labour unions will be forced to stop increasing wages and the economy will stabilize. One issue right now is that underdeveloped countries are paying citizens too much, and wages rise faster than prices, where Germany for example, pays people less, and is overall more productive. For a country like Germany who was doing well before the euro came into play, is now paying the price for underperforming countries.
The Second solution is for weaker European countries to adopt a different, lower value form of the euro. One that is worth less, but will allow these underdeveloped countries to grow prosperous once again, then adopt the regular value euro in the future once things have stabilized.
As a successful Canadian economist in today’s era, Robert Alexander Mundell will be remembered as a Nobel Prize winning economist for his work in monetary dynamics and optimum currency forms. This work would also credit Mundell with being the “Godfather” of the euro and was one of many who started the movement of supply-side economics. During the course of his life, he is responsible for introducing the economic terms the Mundell–Fleming model and Mundell–Tobin effect (Wallace, 2006). Currently, Mundell is the Economics Professor at Columbia University. This paper will explore the life and times of this inspiring figure.
Life and Accomplishments
Mundell was born and raised in Kingston, Ontario. At the age of 22, he earned his Bachelor’s Degree in Economics from the University of British Columbia, and received his Master’s Degree from the University of Washington in Seattle (Britannica, 2013). When Mundell finished his studies at the University of British Columbia, he decided to attend the prestigious Massachusetts Institute of Technology, where he received a PhD in Economics. In 2006, the University of Waterloo awarded Mundell an honorary Doctor of Laws degree (Mundell, 2013).
During his distinguished career, Mundell worked for the University of Chicago as the editor of the Journal of Political Economy and the professor of economics from 1965 to 1972. Since 1974, Mundell has been with Columbia University as the professor of economics (Columbia, 2007). Throughout the course of his career, Mundell has won numerous prestigious awards such as the Guggenheim Fellowship and the Nobel Memorial Prize in Economics (Speakers Associates). Also, Mundell’s honorary professorships and fellowships were awarded to him from the University of Chicago, Brookings Institution, McGill University, the University of Southern California, the University of Pennsylvania and Renmin University of China (Columbia). In 2005, Mundell was awarded with the Global Economics Prize in Kiel Germany, from the World Economics Institute. Furthermore, in Beijing China, The Mundell International University of Entrepreneurship is named in Mundells honor.
In 1999, Mundell won the prestigious Nobel Memorial Prize in Economic Science for his lecture on the Reconsideration of the Twentieth Century. Mundell received this honour because of his analysis of different exchange rates under optimum currency areas (Frangsmyr, 1999).
Since 1974, Mundell has been teaching at Columbia University where he works as a professor in the economics department. After Mundell completed his post-doctoral research at the University of Chicago, he started teaching economics at Stanford University, and then he moved to Johns Hopkins University. Mundell decided to return to the University of Chicago as a professor of economics, and during the summer months, he taught in Switzerland as a professor of economics at the Graduate Institute of International studies until 1975 (Econlib, 2004). In 1989, Mundell taught at the University of McGill as the Professor of Economics.
During the early 1970s, Mundell also served multiple parties such as the United Nations, the United States Department of Treasury, the World Bank, the European Commission, and the government of Canada. Throughout his distinguished career, Mundell has made major contributions to the world of economics: his work on optimum currency areas; his help in starting the movement of supply-side economics; the Mundell–Tobin effect which suggests that nominal interest rates would rise less with inflation because the public would hold less in money balances and more in other assets, which would drive interest rates down; and finally the Mundell–Fleming model which shows the relationship between the economy’s outputs, interest rates, and nominal exchange rates (Frenkel, 1987).
Mundell is the author of a number of works and articles on the economic theory of international economics, and he helped develop one of the first plans for a universal currency in Europe and is known as the godfather of the theory of optimum currency areas (Krugman, 2012). Mundell was a one of the first to believe in the theory of the monetary and fiscal policy mix, the theory of inflation, interest and growth, the monetary approach to the balance of payments, and one of the co-founders of supply-side economics (Mundell, 1968). Mundell has also written elaborate articles on the international monetary system and its history.
The reason why he is recognized in politics for his work with economics is because of his work on currency and international exchange rates for which he was given the Sveriges Riksbank Prize by the Bank of Sweden for his work in Economic Sciences.
During the 1960s, Canada floated its exchange rate, which Mundell began to investigate, as this issue was puzzling to him (IMF, 2006). It was at this time that Mundell began to co-author a book with Marcus Flemming titled The Mundell-Flemming Model of Exchange Rates (IMF, 2006). In his book, it is stated that to have fixed exchange rates, domestic autonomy, and free capital flows was not possible because to meet more than two of those objectives was impossible (NISTICO, 2010)
Mundell, who was given a lot of public attention by some conservatives, because he was one of few people who believed the need for a fixed currency based on gold or a currency board (Columbia, 2000). Mundell is still well known for revealing that only by a positive balance of payments can the expansion of the money supply come about in a floating exchange rate system.
Mundell is noted for working on many economic theories, but one of his most significant is the Optimum Currency Area. This theory is explained as a geographical area that bands together and decides to implement a single currency or a fixed exchange rate within its regions. The theory of optimum currency area can have benefits in a region by increasing trade; however, this must outweigh the costs of giving up the national currency to be effective. Allowing the use of an optimum currency area would also maintain an adjustable exchange rate system with the rest of the world.
In 1999, Mundells idea was put in place by introducing the euro. The creation of the euro in is often cited as a prime example of an optimum currency area theory. However, after only 11 years, the optimum currency theory was put to the test as debt issues faced by a number of nations in Europe are heavily in debt and the euro is being strained (Palast, 2012). One of the issues over the years is that weaker European countries had to rely on devaluations to remain competitive, which in turn stuck them with high inflation and slow growth. This devaluation was due to government mandated benefits that ensured wages would rise faster than prices. If prices cannot rise, then wages and benefits must be cut and productivity must increase (Tully, 2012).
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Mundell argues that what he had predicted is actually following his theory, he claims that while an individual European country cannot change exchange rates, it’s a perfect opportunity to moderate labour union demands because the impossibility of depreciation. One of the euro’s big benefits, he stated, is enhanced wage discipline. Mundell believe the problem the euro is facing is due to government spending and deficits (Tully, 2012).
Allen Meltzer, another economist, completely disagrees with Mundell. Meltzer on the other hand claims that it’s not government spending that is hurting the euro, but competitiveness, and that it’s actually the weaker countries that are dragging down once prosperous nations before the euro came into play. Currently, production costs in Spain and Italy are 30% more than in Germany. But it was the Germans who actually got more productive versus Spain and Italy (Tully, 2012).
One solution to the euro problem is to have the weaker European countries adopt a lower value euro and keep the euro in more prosperous European countries, which in turn would help weaker countries grow and later on rejoin the euro once labour markets have been reformed (Tully, 2012).
In closing Robert Alexander Mundell is a scholar who is an accomplished scholar and has had a tremendous career in the world of education and economics. His work with the Mundell–Tobin effect which was covered earlier in this paper, the Mundell–Fleming model, and finally, his work on the optimum currency area theory paved the way for the instilment of the euro and the overall effects it would have on the countries that adopted it. In regards with what is happening in Europe now, Mundell still feels that events are transpiring exactly how he saw it, and only time will tell how things pan out.
Living in Kingston, I would very much like to meet Mr. Mundell and hear about all of his accomplishments in life and listen to stories about all that he has accomplished in his 82 years.
Frängsmyr, T (1999). Les Prix Nobel. Retrieved from Nobel Prize: http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1999/mundell-bio.html
Mundell, R. (1968). International Economics, pp. 152-176. Retrieved from Columbia University: http://www.columbia.edu/~ram15/ie/ie-11.html
Investopedia (2014). Optimum Currency Area Theory. Retrieved from Investopedia: http://www.investopedia.com/terms/o/optimum-currency-area-theory.asp
Krugman, P (2012). Revenge of the Optimum Currency Area. Retrieved from The New York Times: http://krugman.blogs.nytimes.com/2012/06/24/revenge-of-the-optimum-currency-area/
Tully, S (2010). Two legends in economics wrestle over the euro’s future. Retrieved from Fortune: http://fortune.com/2012/08/09/two-legends-in-economics-wrestle-over-the-euros-future-2/
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Econlib (2014). Robert Mundell was awarded the 1999 Nobel Prize in economics “for his analysis of monetary and fiscal policy under different exchange rate regimes and his analysis of optimum currency areas.” Retrieved from Library Economics Liberty: http://www.econlib.org/library/Enc/bios/Mundell.html
Palast. G (2012) Robert Mundell, evil genius of the euro. Retrieved from The Guardian: http://www.theguardian.com/commentisfree/2012/jun/26/robert-mundell-evil-genius-euro
Wallace. L (2006). Ahead of His Time. Retrieved from: International Monetary Fund http://www.imf.org/external/pubs/ft/fandd/2006/09/people.htm
Warsh, D. (2012) Hard Times for the Elusive “Father of the Euro”. Retrieved from Economic Principals:http://www.economicprincipals.com/issues/2012.05.27/1371.html
Encyclopaedia Britannica. (2014) Robert A. Mundell. Retrieved from Encyclopaedia Britannica: http://www.britannica.com/EBchecked/topic/397448/Robert-A-Mundell
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