Published June 12, 2012
The longer Europe puts up with the fantasy that a single currency is essential to its prosperity, the longer Italy, Spain, Greece and others will flirt with financial ruin and self destruction. No bailout can save Mediterranean economies from recurrent crises as long as they use the same currency as Germany and other northern states.
When the euro was established in 1999, prices, debts and bank accounts were converted according to market-determined exchange rates. For Italy, prices and obligations were converted according to the average value of the lire against other currencies in the euro zone, and those adequately reflected the competitiveness of Italian workers and its exports overall.
Over the next decade, productivity grew faster in the north than among Mediterranean states owing to differences in culture, geography and economic policy—importantly, not all of those are within the control of national governments.
If Mediterranean economies had the own currencies, their exchange rates against northern currencies would fall in value to maintain price and wage competitiveness and employment.
Locked into a single currency, prices in the Mediterranean region became too high across an increasing range of products. The north enjoyed trade surpluses with the south, and governments in Italy, Spain and Portugal increasingly borrowed to hold down unemployment. In Spain, a rush of real estate investment—northerners seeking second homes and vacations in its sunny clime permitted its banks to do the borrowing instead of Madrid.
The US economy has similar problems—worker productivity is flat out higher in New York than in Maine or places in the rural south—but government programs that shore up employment in lagging areas are largely paid for by Washington—Brussels lacks such fiscal authority. And workers migrate to jobs in more prosperous and productive locations more easily, because they share a common language and culture, and similar educational systems.
States get into chronic fiscal difficulties—for years it was New York, and now it is California—but not the kind of trouble Italy and Greece have fashioned.
When banks fail, the US Treasury and Federal Reserve do the cleaning up. During the global financial crises, state governments, even if they had Washington’s taxing capacity, could have never cleaned up Manhattan’s financial institutions or shored up banks in places like Nevada and Florida that mirrored what is now happening in Spain.
In Europe, bank regulation, deposit insurance and responsibility for guaranteeing the solvency of banks is in the hands of national central banks and agencies. Without the capacity to print currency, the Spanish banking crisis demonstrates those national institutions lacking the resources and clout necessary to get the job done. In contrast, Iceland, facing similar challenges but having its own currency, is working its way out.
To have a common currency, Brussels must have the taxing authority to finance the social safety net throughout Europe, and the European Banking Authority and European Central Bank must have the power, resources and responsibilities enjoyed by the Comptroller of the Currency, Federal Deposit Insurance Corporation and Federal Reserve.
To have political legitimacy, that requires a European federal government, and for Germany and other prosperous states to cede national sovereignty to it. That simply is not going to happen.
Sadly, Europe did quite well with national currencies and free trade within the European Economic Community. This is one of those rare occasions that bringing back the old—national currencies—simply recognizes reality and common sense.