There's a fantastic Guardian piece going around, and if you're looking for a laugh this Friday, this could be it. Will Hutton argues that if only Britain had joined the euro, everything could be better.
Now, almost everyone (even those who initially backed the UK joining the euro) has agreed that this would have been a horrible mistake. We're now witnessing a tragic state of affairs where countries are locked into an exchange rate constraint. Much of southern Europe could benefit from a depreciation, while seeing their economies crippled by a lack of demand and with record unemployment.
But Hutton is fairly inventive in constructing an alternative narrative. In Hutton's version of events, the UK would have reformed the Eurozone structure to accommodate British concerns, the European Central Bank would resemble the US Fed and Germany would ask for a more conservative EU banking system.
Hutton goes on to describe a lot more of what might or could have been (including a claim that Blair could have sacked Brown before he became PM), but we have no way of knowing what would have happened.
So, what do we actually know about the euro, and why are we seeing so much misery in the countries that have adopted it? Part of the reason is in the pronounced differences between the economies lumped together by the project. A note from JP Morgan last year showed that economies beginning with the letter "M" have more in common than the first 12 members of the euro:
Many also advocate that freely floating exchange rates are a very good thing (at least for developed countries), to ease the process of price adjustments. From Milton Friedman's "The Case for Flexible Exchange Rates":
The argument for a flexible exchange rate is, strange to say, very nearly identical with the argument for daylight savings time. Isn't it absurd to change the clock in summer when exactly the same result could be achieved by having each individual change his habits? All that is required is that everyone decide to come to his office an hour earlier, have lunch an hour earlier, etc. But obviously it is much simpler to change the clock that guides all than to have each individual separately change his pattern of reaction to the clock, even though all want to do so. The situation is exactly the same in the exchange market. It is far simpler to allow one price to change, namely, the price of foreign exchange, than to rely upon changes in the multitude of prices that together constitute the internal price structure.
But a better explanation in this case may be that commitments between nations are not credible, says economist George Selgin:
The promises in question could not possibly have been kept so long as the EMU’s members enjoyed substantial fiscal sovereignty. The combination of effectively unconstrained fiscal sovereignty and a lack of credible commitments to avoid both centralized debt monetization and outright member-state bailouts created a perfect storm of perverse incentives.
As we’ve seen, so long as unlimited fiscal sovereignty prevails, member states can find themselves in a position to take the monetary union hostage, forcing the central authorities to renege on one or both of heir other commitments. It follows that either the principle of fiscal sovereignty must be abandoned in favor of something like an outright fiscal union, or that the union must abandon its commitment to either independent monetary policy or the no-bailout clause, exposing the union to the consequences of unconstrained fiscal free riding, with all the regrettable consequences that must entail.
He highlights that the prediction of Martin Feldstein seems to be bearing-out, and that the monetary project will ultimately divide Europe rather than unite it. Many are now angry in the richer North that they are being expected to bail out the struggling South.
What can we actually conclude from the single currency experiment? Probably that things would be much better if no-one had signed up to it.