Euro­pean money union didn't work ei­ther

The Pak Banker - - OPINION - Renuka Rayasam

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.

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