Mike Moffatt at About Economics gives us the heads up on an interview with Milton Friedman (seeming pretty talkative these days), appearing in the Spring issue of New Perspectives Quarterly. Dr. Friedman is not yet ready to declare the euro experiment a success:
The euro is going to be a big source of problems, not a source of help. The euro has no precedent. To the best of my knowledge, there has never been a monetary union, putting out a fiat currency, composed of independent states.
There have been unions based on gold or silver, but not on fiat money—money tempted to inflate—put out by politically independent entities...
Inflation is a monetary phenomenon. It is made by or stopped by the central bank. There has been no similar period in history like the last 15 years in which you’ve had little fluctuation in the price level. No matter what else happens, this will maintain as long as the US Federal Reserve maintains strict monetary policy and control of the money supply.
The same thing is true in Europe. The ECB (European Central Bank) has held down the rate of monetary growth. So there have been stable prices. The pressures in Europe, however, will be much stronger than in the US. The main pressure is to print money and be more expansive in order to promote employment.
What the ECB does really depends on whether Germany and France and Italy will back it. Italy may well be the main problem...
In this sense, the euro is good for Europe. But only if there is flexibility all around. The problem is that, in a world of floating exchange rates, as Italy was before the euro, if one country is subjected to a shock which requires it to cut wages, it cannot do so with a modern kind of control and regulation system. It is much easier to do it by letting the exchange rate change. Only one price has to change, instead of many.
But now, in the euro, that option is taken away. The only alternative if a state has to adjust to a shock is to let internal prices vary. It has to let wages go down, if necessary.
There is, of course, much much more, with Professor Friedman commenting on the danger Iraq policy poses to U.S. influence, on why he is not worried about trade and fiscal deficits (and why you shouldn't be either), on the challenges posed by aging populations, and (no surprise) the virtues of free markets. You will do yourself a big favor by checking it out.
UPDATEL You might enjoy reading Friedman's comments on deficits along with those from Don Boudreaux and from Brad Setser.