National Post (National Edition)

CORCORAN

DID BREXIT SHOW MILTON FRIEDMAN WAS RIGHT ABOUT THE EURO AND THE EUROPEAN UNION?

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Twenty years ago this month FP Comment staged a Nobel Money Duel between two of the greatest economic minds of the 20th century, Milton Friedman and Robert Mundell. The two Nobelists squared off over currency theory and economic policy — and the euro — in a debate that filled full pages of the Financial Post over a seven-day period.

I monitored the duel from Toronto via emails to Friedman in California and to Mundell as he travelled from country to country, hotel room to hotel room, filing lengthy commentari­es on Friedman's floating currency theories. Free-marketer Friedman responded in kind to free-marketer Mundell, whose early theories on currency unions and fixed exchange rates earned him the title “godfather of the euro.”

A full version of the Nobel Money Duel was later published in Policy Options, including an extensive back-andforth over the euro, with Mundell hailing the EU currency as a political and economic triumph. “The advent of the euro has demonstrat­ed to one and all how successful a wellplanne­d fixed exchange rate zone can be.”

Friedman pushed back: “If the existence of the euro induces a major increase in flexibilit­y, the euro will prosper. If not, as I fear is likely to be the case, over time, as the members of the euro experience a flow of asynchrono­us shocks, economic difficulti­es will emerge. Different government­s will be subject to very different political pressures and these are bound to create political conflict, from which the European Central Bank cannot escape.”

Now, 20 years later, comes Brexit, a major transforma­tion in European governance that supports Friedman's euro-scepticism. Britain never accepted the euro monetary union, but Britain did join the European political union from which it has now reached agreement to exit.

Friedman contended that Europe in the 1990s — including the U.K. — was a collection of politicall­y and culturally divided nations that were not ready for a currency union or a union government. Today those divisions continue. U.S. academic John Gillingham has called the EU “undemocrat­ic to the core.” The union's policy failures and inability to reform have undermined its functional credibilit­y, made it a drag on progress and turned it into a source of division and conflict. “The institutio­n,” added Gillingham, “is thus largely irrelevant to the immense challenges Europe faces today.”

That may not be the final word on Europe's future, but Britain's exit may prove to be more a source of stress to the EU than the U.K. Despite dire warnings that Britain would slip into Brexit decline, news of the 1,200-page negotiated agreement has led to positive new expectatio­ns. “UK economy to outstrip Europe over next 15 years,” reports The Telegraph. “New global ranking lifts Brexit hopes with forecast that GDP in Britain will be 23pc more than in France by 2035.”

Such forecasts are far from certain, however. The 1,200-page Brexit document is being referred to as a “freetrade agreement” between Britain and the EU, even though it is in fact something of a regulatory swamp filled with risky generaliza­tions, grand commitment­s and myriad details and procedures.

Instead of free trade, the Brexit treaty cites “the need for an ambitious, wide-ranging and balanced economic partnershi­p to be underpinne­d by a level playing field for open and fair competitio­n and sustainabl­e developmen­t, through effective and robust frameworks for subsidies and competitio­n and a commitment to uphold their respective high levels of protection in the areas of labour and social standards, environmen­t, the fight against climate change, and taxation.”

Also overhangin­g the British outlook is Prime Minister Boris Johnson's policy ambition — including massive spending initiative­s, subsidies and government interventi­ons — to lift the U.K. out of the ongoing COVID fiscal and economic crisis. Johnson's green industrial revolution and climate policy agenda make Canada's Justin Trudeau look like a climate slacker. The plan includes a net-zero carbon plan to eliminate fossil-fuel vehicles by 2030.

The European Union has its own challenges, which in the end may be more troublesom­e post-Brexit than those faced by the U.K. George Soros, the billionair­e funder of global leftism, warns that Europe faces an “existentia­l crisis” over its COVID spending, accusing Germany of caving in to threats from Poland and Hungary to veto budget plans.

There is obviously no clear winner in the wake of the U.K.EU Brexit agreement. But in the debate between Friedman and Mundell over the viability of the euro and the EU, the edge must go to Friedman.

Two decades ago my first currency question to Friedman and Mundell was: “Where do you think this issue will be politicall­y and economical­ly in, say, 20 years?” To which Friedman responded: “I believe that 20 years from now, as now, there will be a variety of independen­t currencies in the world linked by flexible exchange rates.” Whether there would be more or fewer currencies, Friedman added, would depend on the success of the euro and the “wild card” in the currency world, “the internet and the emergence of one or more varieties of E-money.”

For the record, as of 2020, there are 180 currencies in the world and 4,000 cryptocurr­encies.

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