Well before the creation of the euro, the Canadian, Robert Mundell, was to enumerate the conditions of success for a monetary union. His works won him the Nobel Prize in 1999, precisely the year that the euro was launched. According to Mundell, a currency shared by a large geographic area is only viable when there is mobility of capital and labour, salary and price flexibility, similar economic cycles and tax transfers within the zone.
In other words, money but also workers should be able to (and want to) travel and settle in different parts of the Union. Prices should even be allowed to be lowered if necessary and not only increased. The members of the Union should at the same time see have an expanding economy or suffer together its contraction. Finally, solidarity (unconditional, ideally) should allow certain regions in torment to receive financial support from an organ created for this purpose or from a federal government.
Nowadays, the European Union in no way possesses any of these features, which makes it a barely viable Union, at least according to the criteria set out by Mundell, unlike the US whose structure allows it to absorb economic shocks. An employed person in South Carolina is in fact able to move to Texas where they have just found a job whereas a Greek would find it hard to set themselves up in Sweden, and vice versa of course! Discounting the language and mentality barrier, a European country that has been damaged or is suffering a considerable slowdown in its economy doesn’t receive any subsidy for its central administration to make a turnaround and successfully fight off a recession. The union in place in the US only functions the way it does thanks to the mobility of its workforce, constant intra-zonal capital flows and institutionalised automatic mechanisms that cushion the blow of financial shocks.
In fact, unhappy with its “congenital” deficiencies, the European Union reveals itself to be a machine that produces bubbles – that is to say imbalances – due to one sole interest rate shared by regions and nations who together bear the brunt of real diverging exchange rates between them. In the current European situation, the euro is basically acting as a gold standard in that adjustments and indispensable re-balancing acts – which cannot come to fruition through the valve of an appreciating and depreciating currency – are being made exclusively via the transmission belt of prices and salaries. The euro obviously cannot be converted into yellow metal but – in the absence of the characteristics outlined by Mundell and in the presence of a uniform interest rate for all members – it constricts economies and produces recessions. The reign of the gold standard is in fact presented as adjustments that are routinely borne by weak economies and currencies while sparing the strong countries.
Isn’t it peripheral Europe that has been the victim of all the imbalances to have come out of the current European crisis? With this in mind, we should remember that in its time the gold standard exerted downward pressure on certain fragile currencies of nations who were suffering economic contraction and high unemployment due to their lack of ability to proceed with vital internal fine-tuning. The euro – like the gold standard – aggravates the situation for countries in recession by blowing up deflation. Let us never forget that it was the upholding of the gold standard which came to prevent an efficient fight against – and even the anticipation of – the Great Depression. And let us also remind ourselves that it was the countries that weren’t part of it, or that got out quickly at the time, that were the first to recover, or that came out relatively unscathed.