Source: Financial TimesThe EU’s political leaders and other elites are committed to holding the European Union together. To them, united Europe is an article of faith. They hold the idea with as much ferocity and fervor as any religious belief. But while the European Union is a wonderful political idea, it’s economically terrible. And the EU nations will have to face up to bearing enormous costs to save the Europe we wished for.
Why the Euro Doesn’t Work
Many of us take our national currencies for granted and we assume there have always been dollars, pounds, or yen. In fact, for a long time, individual banks issued notes promising the holder to exchange the notes for gold upon demand. The concept of a national currency is actually one that came about very late in history.
Before the euro was created, the economist Robert Mundell wrote about what made for an optimal currency area. His work was so important that he won a Nobel Prize for it. He wrote that a currency area is “optimal” when it has:
- Mobility of capital and labor,
- Flexibility of wages and prices,
- Similar business cycles, and
- Fiscal transfers to cushion the blows of recession to any region.
Europe has almost none of these. Very bluntly, that means it is not a good currency area.
The Price of a United Europe
The True Believers, however, will do almost anything to realize their vision of a united Europe. I believe that, to hold their union together, the core nations will ultimately absorb the debt of other member nations.
They will do this through the European Central Bank’s balance sheet, nationalizing all the debt. In exchange for this bailout, the debtor nations will sacrifice their fiscal autonomy on the European Union’s political altar.
…click on the above link to read the rest of the article…
