No Currency Union in History has Ever Worked
Which is why the euro may be doomed.
Is doomed, according to investor Jim Rogers, speaking at a Reuters conference yesterday.
The idea that the currency union that holds the EU together might collapse was, for a long time, unthinkable. And even now, it looks unlikely. But people are thinking about it, in a methodical and sober way. From the Economist:
Introducing a new currency would be difficult but not impossible. A government could simply pass a law saying that the wages of public workers, welfare cheques and government debts would henceforth be paid in a new currency, converted at an official fixed rate. Such legislation would also require all other financial dealings—private-sector pay, mortgages, stock prices, bank loans and so on—to be switched to the new currency.
Once you start thinking about it, though -- once it becomes not-unthinkable -- it's really just a matter of figuring out ways to get over the hurdles: there would be banking chaos for a while, and of course it would be hard to figure out what bonds were worth, but those are things that the central banking industry is designed to work out.
Meaning: it could be done. Especially by a strong country like Germany, fed up with endless bailouts of more profligate and insolvent partners. Again, from the Economist:
Should it opt to leave, [Germany] would have an incentive not to convert its stock of euro-denominated debts to claims in a new, stronger currency. It could instead choose to repay those depreciating debts over time. Rather than invite legal disputes, however, it might instead go for a comprehensive conversion and keep balance-sheets straight. Germany would in any case be able to issue cheap debt in the run-up to conversion. A rush out of euros into German assets in anticipation of revaluation would drive up the prices of Bunds—conceivably to a point where the interest rates on them were negative.
Probably won't happen, of course. But the first step in making the unthinkable happen is thinking about it. And there seems to be a lot of thinking about it going on.
- Comment (12)
- · Quote
- · UnfollowFollow (4)
Comments :
Jun '10
Re: No Currency Union in History has Ever Worked
Currency collectives don't work any better than other collectives. It's one more way for the lazy (and spendthrift) to exploit the industrious (and frugal.)
Nov '10
Re: No Currency Union in History has Ever Worked
We were in London shortly after the Euro notes and coins appeared. As we walked past the Bank of England building I commented to my wife, "I can't see the Brits ever giving up the monetary engine that drove the Industrial Revolution, broke the back of Napoleon's Continental System and confounded Hitler's counterfeiters." I was hoping that Britain would be able to stand athwart history on this one. Ten years later, it seems as though history is flowing the other way, and, although, as you suggest, it may not happen, is it alright to have a little schadenfreude?
Jul '10
Re: No Currency Union in History has Ever Worked
Now you tell us!
May '10
Re: No Currency Union in History has Ever Worked
I assumed that after monetary unity, governmental unity would follow for the countries that adopted the Euro. I figured it would still take another 40 years, but then I started reading the bureaucratic slop that is the "European Constitution" (or the Lisbon Treaty) and realized quickly that will take too long to ever happen.
But really, who's bright idea was it to invite the Greeks and Portuguese into a monetary union? I'm more surprised the Italians, with their long history of devaluation of the Lira and parliamentary gridlock, aren't the reason for the Euro's problems.
May '10
Re: No Currency Union in History has Ever Worked
Remember- there is no meaningful difference between Germany having to bail out Ireland, Greece, Italy, and Spain, and Kansas, Oklahoma, and Texas being asked to bail out California, Illinois, and NY.
No US bailouts. The profligate states need to be reformed, over their (and SEIU's) objections; no exceptions.
Sep '10
Re: No Currency Union in History has Ever Worked
Its fashionable to blame the profligate southern europeans for the crisis but Germany is dependant on exports to the tune of 40% of GDP. The German banks loaned the money to Greeks etc. I don't think a single currency that stimulates free trade and the free flow of capital is a bad thing. The countries might be better able to "handle" t he debt crisis if they could inflate their currencies out of existence but impoverishing the citzenry is not exactly a better outcome in my opinion. The EU is a bureaucracy and should probably be dismantled but the single currency by itself is not a bad idea.
May '10
Re: No Currency Union in History has Ever Worked
I have assumed the death of the Euro for a long time. The diverse fiscal disciplines of the various member countries virtually guarantee it. It is just a matter of time.
Jul '10
Re: No Currency Union in History has Ever Worked
I'd amend the statement slightly to state that no currency union with multiple fiscal entities in history has ever worked, but that makes a lousy headline.
It's like unrelated people sharing a household and pooling all their income, but each can spend from the pool anyway they like. How long before one person buys the Ferrari? And is that period of time even measurable?
How about, "Currency Union Killed by Lazy Bum Roommates"? "European Union: The Joint Checking Account from Hell"? "Keep Your Hands Off My Stash, Jack"?
Oct '10
Re: No Currency Union in History has Ever Worked
Rob, what's interesting is this piece from the print edition which seemed to be saying the German's may huff and puff about this bailout business but they won't leave the Euro. I got the feeling when I first read it that they were subtly trying to dismiss the notion by saying "you Germans are just throwing tantrums." That's the bipolar quality of the Economist that I love.
Jul '10
Re: No Currency Union in History has Ever Worked
The only currency union that ever worked was when I borrowed $100 from Rob Long on the National Review cruise and united it in my wallet with my other currency.
Worked for me.
Oct '10
Re: No Currency Union in History has Ever Worked
There's also this piece too in which they say that whether it's the strong countres leaving or the weak ones leaving it's going to be bad for everyone.
"Breaking up the euro is not unthinkable, just very costly. Because they refuse to face up to the possibility that it might happen, Europe’s leaders are failing to take the measures necessary to avert it."
Aug '10
Re: No Currency Union in History has Ever Worked
>No Currency Union in History has Ever Worked
I guess that depends on what the difference is between a "currency union" and a state. Lots of fairly long lasting empires had a single imperial currency but with substantial autonomy for the provinces including what we would call budgetary authority. For instance, the Spanish dollar was in wide use for centuries from Austria to the Philippines. Sure, none of these empires lasted forever and some of them even dissolved in part because of monetary issues (eg, Rome during the 3rd century crisis), but a lot of them lasted a good long time.
[And to anticipate the gold bug objection that these empires used specie rather than fiat money, note that they could and did practice inflation by debasing the coinage.]
Edited on Dec 8, 2010 at 9:43pm