Optimal currency areas and the politics of fooling around

The passage between Scylla and Charibdis in the ocean of currencies implies neither euro nor drachma, but more democratic control over the economy
Tony Curzon Price
Tony Curzon Price
23 February 2010

The Greek crisis raises again the question – much discussed at the time of the euro's adoption – of what a currency is for and which groups should have one. But these arguments around optimal currency areas, both for and against the euro,  rely to a worrying degree on anti-democratic notions that people – wage earners in particular–are there to be politically manipulated by this or that mechanism. Let me explain.

Paul Krugman thinks the euro was a "currency union too far" because Europe does not have the kind of social and political integration that makes a currency union work. When Greek, Spanish and Portuguese price levels all rose as a result of closer economic integration, that was fine. But with recession, those prices now look too high compared to Northern Europe's, and a long bout of unemployment will follow before balance is reached again. So for Krugman, it is obvious that the PIGS (Portugal, Ireland/Italy, Greece and Spain) would be better off outside the euro.

The euro-enthusiast point, on the other hand, is made by ECB boss Jean Claude Trichet: of course the euro needs better labour market integration, and that is the whole point – it will force that integration on governments and lead to "ever closer union".

At the time of euro formation in 1996, I argued against the euro on the grounds that it would be a centralising force playing into an anti-democratic Brussels. (The only publication I could place the article in at the time (this was before web publishing seemed of any use) was in Roger Scruton's Salisbury Review – it appealed to a then slightly marginal notion of national sovereignty). Today, in a way, is the moment of vindication for that argument.

But that argument – essentially a version of the the Krugman point which goes back to the Canadian economist Bob Mundel's work on currency unions – assumes that wage-earners cannot be trusted to understand their environment and modify their economic behaviour in relation to changes in it. Instead of having millions of Greeks all meeting to decide how they as groups of wage-earners should respond to the problem of public indebtedness, Krugman would rather see a well-meaning government devalue the currency, changing all prices in one, centralised go.

Similarly, Trichet and his pro-euro argument has a picture of workers in disparate nations all being transformed into constructive pieces of the european jigsaw through changes to labour-market practices that are required for the euro's stability – it is, even for the euro-enthusiasts, one of those policies that constrains national governments to do the right thing in reforming their domestic arrangements.

So both Krugman and Trichet, despite ending on opposite sides of the euro question, assume that the mechanism by which the currency does or does not work is one that involves having large impacts on the economic lives of wage-earners without their consent, understanding or participation. Currency areas might well be adopted for Mundell-type reasons by groups of people in full democratic control of their lives. Indeed, all the experiments in various script currencies, community currencies and local barter markets are examples of just this sort. But this is not what the current Greek discussion is about.

Is it better for the Greeks – and whoever is next in-line for the wringer – to be fooled by euro-elites or by national technocrats? Sounds to me like Scylla or Charibdis, with the only right answer being neither.

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