Sunday, 7 October 2007

After the Euro (1)

One of the things that might speed up the dissolution of the EU is when the tensions and frictions between the Northern and Southern Euro-zone countries becomes too great and half of them leave in a huff.

Now, as a lesson in non-financial economics, although the idea of a single currency is superficially attractive, the simple facts are ...

1. There was a global single currency for a couple of millennia. It was gold.

2. Over the past couple of centuries, most countries use their own paper currencies, backed only by future government tax receipts. Sure, there was a transitional period, where currencies were linked to a gold-standard, and subsequently the Bretton Woods system of fixed exchange rates, but this gradually fell apart.

3. There have been dozens of currency unions over the years, most of them have fallen apart again, for good or bad reasons.

4. If currency unions were such a good idea, they would never have fallen apart, and progressively more countries would have signed up, and we would expect to see a few large blocs, let's say one or two currencies per continent.

Ergo, tensions between the members of the Euro-zone will flare up sooner or later (my guess is in six months to three years) and a lot of them will leave. Of course, the Euro-zone is only a subset of the EU, and membership of the latter does not really require membership of the former, but this will lead to even greater frictions at EU level.

Especially if Germany tells France to stop pissing about with trying political pressure on the ECB to keep interest rates down. The Germans have a powerful collective aversion to devaluation and hyperinflation as a result of what happened in the 1920's. If Germany forces France out the Euro-zone for bad behaviour*, then the EU's days are pretty much numbered as well.

* When Germany forced the UK out of the ERM, there wasn't even any malice involved. The Germans had to double their interest rates to prevent inflation taking off as a result of Helmut Kohl's rather reckless promise to convert East German to West German Marks one-for-one, when the real exchange rate was actually about ten-for one. But we know what the Frogs are like for going off in a huff**.

** See also the cheese-eating surrender monkeys leaving NATO and, forty years later, considering rejoining.