For whom the Euro tolls

Without political and fiscal union coming first, currency unions do not work.

In fact currency unions place a rigid constraint on freedom of action in the political and fiscal arenas. History has far more examples of failed currency unions than of any successful ones and – nearly always – the successful ones are because political and fiscal union has come first. The UK, USA, Federal Germany and the USSR are (or were) firstly political and fiscal unions which allowed for a successful common currency. Currency union is not a tool which enables political and fiscal union. It is political and fiscal union which allows currency union.

It is the believers in the Holy European Empire (in Bonn, Paris and Brussels) who think they can use the Euro to force the union.

The failed examples range from the

  1. New England colonies who each printed their own money but which was acceptable at par in all 4 states till other colonies outside the union started printing the money as well. Massachusetts withdrew and introduced a silver standard. (???? – 1750)
  2.  The Latin Monetary Union which was a French inspired ego-project based on a silver/gold standard and joined by Belgium and Switzerland. It was later joined by Italy, Greece and Bulgaria. But it could not cope with fraud with silver content coins as the gold standard was introduced in other countries since it had a fixed exchange rate between gold and silver (15:1). It was formally founded in 1865 and came to an end with WW1 but officially only in 1926.
  3. The Scandinavian Monetary Union started in 1873 but became dormant in 1905 and came to an end officially in 1924. It worked for a while but could not withstand the variation of inflation in the different countries which led to a string of devaluations and dumping gold in the open market and rebuying it at much lower fixed rates from the unofficial Central bank.
  4. The East African shilling bringing Kenya, Uganda and Tanganyika (and later Zanzibar) started in 1922 pegged to Sterling. It survived independence of these British colonies but could not withstand the depreciation of the British Pound when the Sterling Area collapsed in 1972.
  5. The CFA (African Franc) was started in 1945 in the French colonies of West and Central Africa and is still in use. It was pegged to the French Franc and  is now pegged to the Euro. Even if it may have contributed to currency stability it is one of the key reasons why economic planning for the very diverse developing countries of Central and West-Africa has become impossible.

There are many other examples, but the simple conclusion is that without political and fiscal union already existing, a currency union is not a way of imposing such political or fiscal union. If there is diversity among the countries involved and if fiscal and political measures need to be different in different regions, then currency union is far too rigid and can only promote political dissatisfaction and populist revolt.

And so it is with the current Eurozone. There is no political or fiscal union and currency union is being used (by some) as a tool for trying to impose a political union. The countries of the Eurozone are far too diverse politically and fiscally to be forced into a common shape by a common currency. The Eurozone is wishful thinking. When Marxists in Greece want to try their experiments it cannot possibly be reconciled with capitalist regimes elsewhere.

Any country which needs to exercise political and fiscal freedom cannot – actually must not – subject itself to the strait-jacket of a currency union. Greece should never have joined – or been allowed to join – the Eurozone. Cyprus should never have been allowed to join either. Currently, of the Eurozone countries, Finland, Latvia, Lithuania, Malta, Portugal, Slovakia, and Spain would be better off without the political and fiscal constraints that is set by the Euro. Kosovo and Montenegro have adopted the Euro voluntarily but they are not constrained in quite the same way.

As far as Greece is concerned I hope they leave the Euro (and remain in the EU for now) and so kick-start the process of bringing the grandiose, but untimely, Euro experiment to an end.

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