IF 200 -- August 29, 2011 -- 11/20

Currency Unions too have a long history.    They tend to come and go.    Currency Unions have a good chance to be successful and stand the test of time only when:

a) based on economic inter-relationships and acceptable power structures among union
members, as well as between the union and other currency zones and currencies;
b) rampant arbitrage is not allowed;
c) there is also a political union (i.e., in USA, USSR, UK and Germany);
d) there is a single fiscal policy;
e) there is a central monetary management;
f) wage and price flexibility are a “sine qua non”;
g) there are clear convergence criteria; and...
h) there are clear monetary convergence targets.

Ever since the fall of the Roman Empire, a dream of European unity and of a dominant European political structure has long animated the continent.    After two World Wars, Europe was finally liberated from Nazism in 1945.    In November 1989, with the tearing down of the Berlin Wall, the Eastern-half of the European continent was able to overcome 40 years of communism.    Finally, European political division started healing.    The healing process culminated with the historic milestone of May 1, 2004, when barriers created by the Cold War were finally removed.

With the accession of Bulgaria and Romania in 2007, the EUROPEAN UNION (EU) counts 27 Member States, with a total population of almost 503 million inhabitants -- 23 official languages.    Despite all the agonising about whether or not it would work, the European Union has effectively created the world’s largest trade bloc stretching from the Atlantic to the borders of Russia, with a nominal GDP over €12 trillion (in 2010) -- or, approximately $16 trillion, larger than the $14.7 trillion of the United States.    With 7% of the world population, the EU’s trade accounts for about 20% of global exports and imports, only second to the U.S.A.

Within this larger Community exists a separate currency union, the EUROZONE, made of 17 member states which have adopted the EURO as a common currency.    The EUROZONE represents a total population of almost 332 million inhabitants, and €9.2 trillion GDP (2010).

The adoption of the EURO was expected to lead to economic convergence, but that has not happened.    The European Union failed badly by not creating first a “political union”, which would have been the “indispensable solid foundation” for the economic, monetary and fiscal bloc’s survival.

In principle, the European dream was extraordinary:   nations would be combined into a single economic regime, which in turn would evolve into a single united political entity!    The idea was impressively imaginative and a great gamble!    The trouble is that it has not worked. 

The European project was to endorse “unity” in all respects: social, political, economic and strategic including security and defense.    Being “European” would have to translate into sharing a “single fate” and “common burdens”.    With hindsight, Europeans only shared interests, but not a single fate!    Furthermore, the European Monetary Union, fierily trumpeted at the four corners of the planet as a smashing success, is turning out already to have been a monumental failure.

To be successful, a single-currency union must involve a central or federal government, with tax and public expenditure authority, based on a “national” or “federal” GDP, also able to run significant deficits when necessary.    The absurdity in the EURO currency union turns around the fact that, within the OECD, member states in the EURO union are the only governments issuing sovereign debt in a currency -- the EURO -- that they cannot print at will!