European money union didn't work either
As Greece and its euro zone lenders hammer out the details of its third bailout package, the focus is on budget deficits and other financial fixes. But if history is any guide, politics - not profligate spending - could be the ultimate stumbling block for the euro.
More than a century after Europe's last failed attempt at a currency union, countries on the Continent are again ignoring the political consequences of their economic endeavors. That oversight could have dire consequences. "Currency and money are much more interconnected with political control than most people think," said Charles Goodhart, emeritus professor at the London School of Economics and formerly a member of the Bank of England's monetary policy committee.
Politics was the undoing of the Latin Monetary Union, created in 1865 to help European countries trade more easily and boost their weight in the global financial system. That year delegates from Belgium, France, Italy and Switzerland convened in Paris and agreed to standardize their metalbacked currencies to stabilize their economies, which were being hammered by new gold and silver dis- coveries around the world.
In reality, the currency union, which expanded to include Greece, Serbia and other countries, lurched from crisis to crisis as members pursued their own economic fate at the expense of others. Even the Papal State treasurer, Cardinal Giacomo Antonelli, tried to game the system by minting less-than-pure silver coins. At one point Greece left the Latin Monetary Union for a few years - foreshadowing German finance minister Wolfgang Schäuble's proposal for a similar solution to the latest euro crisis drama.
When World War One hit, winning the war became more pressing than economic concerns, and the union fell apart, as did a similar currency union in Scandinavia. All told, the currency union lasted about 60 years before it dissolved completely. Currencies that have endured, like the pound sterling and the dollar, exist in sovereign states where financial decisions are closely tied to policymaking. They've lasted through different financial arrangements - from the gold standard to Bretton Woods, through war and inflation.
A currency, more than anything, is a symbol of modern statehood, said Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington. Currencies tend to last as long as the country that mints them. The Yugoslav dinar, for example, fell out of circulation when the country split. When the Soviet Union splintered, new independent states abandoned the ruble for their own currencies. Money "has a lot of political symbolism," said Kirkegaard.
There is a lot of political symbolism behind the euro as well. A common currency was supposed to bring countries closer together and fend off the threat of a European war. However, the Maastricht Treaty, which set up the original parameters of the euro, put moneymaking power in the hands of a supranational body independent of individual governments. European policymakers broke the traditional links between political sovereignty and money creation to a far greater extent than ever before.
The result is a currency union where monetary policy again pays little heed to politics - which is especially problematic today, when European politics are infinitely more complicated. Leaders of euro zone countries are democratically elected and the euro is freely floating, not backed by gold or silver.