Eurozone may end up failed currency union
Tess Vigeland: Europeans are noting a not-so-happy anniversary this week. Amid all the tension over eurozone debt and who should bail out whom, they’re marking 10 years since the launch of the first euro notes and coins. You may remember all the hoopla and hope over the new currency. Suffice it to say the mood has since soured.
But perhaps the Europeans should not have been so optimistic a decade ago. As Marketplace’s Stephen Beard reports from London, currency unions like this one usually don’t pay.
Stephen Beard: Currency unions are usually created for the best of reasons. Economist Andrew Hilton:
Andrew Hilton: Using the same currency is a convenience for everyone If you’re in New York and you have to have a different currency when you cross the bridge into New Jersey, that’s an inconvenience.
He says there was much monetary inconvenience before the U.S. launched its own nationwide currency in the 1860s. There were 10,000 different types of U.S. bank note in circulation. The country was crying out for a common currency. Another advantage: you don’t have the cost of exchanging one currency with another. That explains why currency unions between separate countries have also been popular. Although, not always long-lasting.
Barry Bosworth: The vast majority of them fail.
Barry Bosworth of the Brookings Institution.
Bosworth: They have fallen apart when they have not been in the interests of all the members. The ones that fail they fail when there’s no longer a common benefit.
Take the Latin Monetary Union set up in 1865. France, Italy, Belgium, Switzerland and others adopted the same monetary system. It was backed by gold and silver. It finally collapsed in 1926. Andrew Hilton:
Hilton: In the Latin Monetary Union, the Italians cheated. And they pulled it apart.
The Italians broke the rules by minting many more coins than they were allowed. Another common currency involved the Scandinavian Monetary Union. It was set up in 1872 by Sweden, Denmark and Norway. Barry Bosworth says that didn’t last either.
Bosworth: Basically they cheated on each other, particularly against the Swedish government.
The other countries in the union were increasingly converting their cheap metal coins into Swedish gold, draining Sweden’s reserves.
Bosworth: And Sweden finally decided it didn’t want anything to do with it anymore.
Similar trickery and mistrust have more recently undermined the euro — with Greece lying about the size of its budget deficit and Germany reluctant to bail it out. So what have the Europeans to learn from history and from the success of America’s currency union?
Philip Booth: They have to learn that you can’t have monetary union without some kind of political union.
Philip Booth of the Institute for Economic Affairs says currency unions are always more credible when the member states have a strong common purpose — such as nationhood.
Booth: Ensuring that investors are confident that the monetary union will never break up.
Since the banking crisis erupted three years ago, some investors have complained about the U.S. Federal Reserve debasing the dollar by printing money, but no one seriously doubts that the dollar will survive. The same cannot be said today for the euro.
In London, I’m Stephen Beard for Marketplace.
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