If we ask ourselves “Should there be currency union in Europe?”, opinions differ: yes, no and only partly. But if we ask ourselves the same question about the United States, “Should there be currency union between the States of the Union?”, then I suppose everyone would answer yes. What’s the difference?
The first and most important difference, it seems to me, is that by establishing currency union, you accept the idea that populations will move from unsuccessful economic areas to successful ones. A wonderful example of this in the United States is the drift of population from cities like Detroit, Michigan to those like Dallas, Texas. Of course the move is not direct: it’s simply that Detroit has gradually declined in population and Dallas has gradually grown. The motor trade declined; the oil trade boomed. The effect on Detroit was dramatic. In the 1950’s, Detroit had a population of about 1.75m. It now has a population of about 1m less than that. In other words, a million people or more have moved away from Detroit in that 60-year period. They’ve done so because Detroit was totally dependent on the motor industry, which has now been out-competed by the Asian motor manufacturing countries. The result is extreme: parts of Detroit are simply returning to nature. The value of almost all real estate is close to zero, and much of it has been simply abandoned.
If we apply this to a European context, we have to envisage large transfers of population from countries like Greece and Portugal to Germany. Is that acceptable to Greece and Portugal, let alone Germany? If not, then the effects of currency union could be politically disruptive.
The second, and probably less important, consideration is that unless governments’ budgetary arrangements can be synchronised and controlled throughout the Euro zone area, it’s unlikely that the currency union would be effective or stable. This is because those countries that are inclined to be profligate, like Greece, can run big government deficits and run up monstrous government debts, using the currency as a prop. More cautious countries – admittedly with fairly substantial government debts – like Germany, eventually have to be called on to make the situation good – a situation that they regard as not of their making.
Maybe these two points are two aspects of the same point: if the currency is common, economic stresses have to be catered for in other ways, not all of them very palatable.