From FT Alphaville:
It’s easy to forget now, but the single currency wasn’t created purely as a political project.
Many economists in the 1980s and 1990s thought monetary union would encourage cross-border investment and trade by eliminating the risk premiums associated with the supposedly destabilising devaluations of the past. The net effect would be converging living standards, dampened business cycles, slower inflation, and faster productivity growth for everyone — the benign Germanisation of Europe.
This was a laudable goal, but unfortunately it’s not how things worked out. The policy mistakes that exacerbated the eurozone crisis, while deeply destructive, can’t be blamed. A stimulating conference recently hosted by the Centre for European Reform made it clear to us the euro had already failed to meet the expectations of its architects before the crisis. Sharing currencies was unnecessary for economic convergence, if not actively harmful.
The monetary unions that weren’t
Before getting to the specifics of Europe’s situation, consider the most natural currency union never to exist: Australia and New Zealand.And for more commentary on the meander:
The two commonwealth countries have remarkably similar economies, a shared culture, a common language, and even the same banking oligopoly.
About a fifth of New Zealand’s exports are bound for Australia and, until very recently, around the same proportion of its imports came from Australia. About 12 per cent of New Zealand’s exports to Australia are used as components in Australia’s exports, while about 20 per cent of New Zealand’s imports from Australia are used as inputs into New Zealand’s exports to the rest of the world.
A little more than half of New Zealand’s outbound direct investment goes to Australia and about half of New Zealand’s inbound direct investment comes from Australia. The stock of Australian FDI in New Zealand is equivalent to about 26 per cent of New Zealand’s GDP.
New Zealand’s population is less than a fifth the size of Australia’s, and a large bulk of the changes in the number of people living and working in Middle Earth can be attributed to New Zealanders moving back and forth from Oz, based on the relative health of the two countries’ job markets. (The two governments agreed on free movement of labour among citizens back in the 1970s. After many years in which more Kiwis moved west than the other direction, the commodity bust has finally pushed net migration in the opposite direction.)
Truly, if there were any reason for any rich countries to enter into monetary union, there would be a case for New Zealand to join the Australian dollar zone....MUCH MORE