Very few things are more implausible than the euro zone
The original idea for the European Monetary Union was a bit odd. Here you had a bunch of very different countries — from Germany to Greece to Ireland — yoked together under a single currency, the euro. It sounded more like a reality show than an economic policy. And it hasn’t turned out well.
Via FT Alphaville, this amusing research note from J.P. Morgan’s Michael Cembalest illustrates just how bizarre the euro zone concept was in the first place. Cembalest looked at several proposed monetary unions across history and measured how “different” the countries within them were. As it turns out, the euro zone is the most implausible currency union of them all. It would be slightly more realistic, in fact, to bind together all the countries in the world that began with the letter “M”:
Cembalest measured the difference between countries using data from the World Economic Forum’s Global Competitiveness Report, which ranks countries using over 100 variables, from labor markets to government institutions to property rights. And he only looked at the major economies within the euro zone — Germany, France, Italy, Spain, Netherlands, Greece, Belgium, Portugal, Austria, Slovakia, Finland and Ireland — to avoid distortions. (You could even exclude Greece, he notes, and get similar results.)
And what Cembalest found is that there’s an incredible amount of variation among the euro zone’s member nations. The biggest differences come in pay and productivity, the efficiency of the legal systems in settling disputes, anti-monopoly policies, wastefulness of government spending, and the quality of scientific research.
Not only that, but the euro zone countries are more different from each other than countries in just about any hypothetical currency union you could care to propose. A currency union for Central America would make more sense. A currency union among East Asia’s Tigers would make more sense. A currency union that involved reconstituting the old USSR or Ottoman Empire would make more sense. A currency union of all countries on Earth that happen to reside on the fifth parallel north of the Equator would make more sense.
Now, does this mean the euro zone is doomed? One thing Matthew Yglesias notes here is that there are lots of countries with a single currency that are made up of disparate regions. But they aren’t falling apart the way the euro zone is. The United States is one example. East Germany joining West Germany in 1990 is another example.
One difference, however, was that West Germany paid about $1.9 trillion over 20 years to integrate the two economies. Similarly, the U.S. government spends an enormouos amount of money transferring resources around the country, so that productive workers in San Francisco or New York City prop up less productive workers in places like Mississippi — via federal unemployment insurance, Medicaid, Social Security, and so on.
It’s possible that Europe could eventually set up similar institutions and bind euro countries more tightly together, making the euro zone a fiscal union more analogous to, say, the United States. Indeed, if the euro is to survive, something like that might eventually have to happen. But we’re still very far from that point.