In the United Kingdom, we are in a unique position to watch the chaos of the crumbling eurozone. Media outlets are filled with daily stories of credit downgrades, hundred billion euro bailouts, and fears of member states leaving the single currency. Speaking before the adoption of the euro in 1999, Milton Friedman prophetically stated that the euro experiment would not survive its first major crisis and that “sooner or later, when the global economy hits a real bump, Europe’s internal contradictions will tear it apart.” Thirteen years later we may be witnessing that scenario.
Though the euro may hobble along for years to come, I think it is important to consider the lessons it will leave for future debates on the dangers of monetary unions for other regions. With the creation of the EU, and then NAFTA and MERCOSUR in the 1990s, there has been a marked shift in recent decades towards a regionally based removal of tariffs and trade barriers. According to many economists, much of the economic growth in these respective areas can be traced back to the success of their free trade zones. Before the financial crisis, some academics and policymakers (such as former Mexican President Vicente Fox) began suggesting that, in the long term, North America could follow Europe’s lead and form a currency union of its own for NAFTA. Though this never developed into any formal negotiations, it is important to remember that many once viewed the eurozone as the future of economic integration and a possible model for other regions to follow. This talk has virtually disappeared.
Though a single currency may seem like the logical next step in the evolution of a free trade area, it now appears that the creation of the euro could ultimately be the death of this current form of the EU. Depending on the fallout from the possible dismantling of the euro, the single currency may even threaten to remove some of the gains that have been made in Europe in terms of promoting trade. Economists can debate whether this was the result of the area not meeting the requirements of Mundell’s optimum currency area or simply the result of allowing in too many states whose financial houses were not in order, or both. The fact that Mundell’s concept has been used to argue both for and against the single currency area should have raised some red flags about the theoretical basis of the eurozone in the first place.
The public, however, generally doesn’t care about how things should work in theory, only in practice. In reality, political concerns trumped serious economic issues and states have been unwilling to surrender the levels of sovereignty that are likely required to save the single currency (though whether it can or should be saved are other matters).
What people around the world have learned from this is that policymakers may not understand the conditions necessary for ideal currency unions – they follow their own interests and instincts. Though, fortunately now, mustering the political strength to promote a monetary union in any of these other regional trading blocs would be a monumental task given the results of the eurozone experiment.
What this means for NAFTA, MERCOSUR, ASEAN, and other organisations is that they may never evolve into highly integrated entities like the EU. This will surely turn out to be a blessing given that these areas function perfectly well without a single currency anyway. Rather than form monetary unions, they will learn lessons from the eurozone and keep their own currencies as safeguards against the poor fiscal policies of their neighbours so that when a crisis does occur, they will not be exposed to the same level of contagion and will not find themselves bailing out weaker member states. The free trade areas will remain but governments will be likely to be wary of integrating further.
This will be a positive result. If the desire to integrate monetary and political sovereignty disappears, then the focus can remain on increasing free trade and moving from regional to global free trade – a process that could well be impeded if currency blocs were created to mirror trade blocs.