The survivability of the Euro, Part II
Grounded in economic and political reality and drawing on both theory and experience, this paper seeks to provide investors with an informed and practical framework for assessment and decision-making.
We start with our political-economy framework of a common currency matrix, within which we locate Economic and Monetary Union (EMU) and several other contemporary and historical exchange-rate arrangements in relation to institutional and political structures.
We then turn to the theory of the optimal currency area (OCA) as a basis for what works and what tends not to work for monetary unions in general and the eurozone (EZ) in particular. We consider the striking parallels between early US history and the EZ crisis and look back to earlier European experiments at monetary union.
Finally, we present a brief history of Europe’s quest for EMU. As the European Parliament acknowledges, the EZ is not an OCA. Moreover, it may never become one. It also lacks many of the key features of other long-lasting currency unions, such as automatic fiscal transfers. On balance, then, as few commentators would dispute, it is in many ways suboptimal.
We therefore endeavour to address a critical question that inevitably arises: what do theory and experience have to offer about whether and how the euro can survive?
