If You Love Something, Set It Free

“The European Union [...] has ceased to be completely reliable.” So says Robert Cottrell,  formerly of The Economist, a couple of days ago in The Financial Times, arguing that one has to “set the euro loose from the EU.”  According to Cottrell the strict links between the EU and the European Central Bank (ECB) and thus the Eurozone should be broken. This would allow the currency to float freely and would allow countries such as Ukraine or Turkey, or even Paraguay to join the Eurozone, without joining the EU. However, there would be one strict rule governing this new free floating currency zone. No bail outs for basket cases. This all seems eminently sensible, but I did notice one small flaw in the argument. If anybody can join the ‘zone,’ then surely anybody can leave as well?

This is how he sees it improving the EU:

“Even the EU might work better as a result, since it would no longer be divided into two camps, eurozone ins and outs. Indeed, EU countries that have resisted the eurozone until now for fear of getting caught up in a political union might find it easier to join a separate monetary union with no such associations. Europe would get more, not less, integrated.”
The missing words are that people would also feel free to leave if there were not such massive ramifications.

This piece has been followed up by a very odd piece in the current edition of European Voice.  The piece is authored by John Wyles  of the Brussels lobby group Gplus. Wyles is a former FT correspondent in Brussels and worked for the EU where he drew up the respected propaganda campaign (PDF) for the introduction of the Euro.

Titled “Doomsday could beckon for the Euro in your pocket”, it footnotes the recent HSBC document European Meltdown (PDF)(which famously hints at the possibility of Italy leaving the zone), but seems not to have taken its arguments into account. Like Cottrell, Wyles is a true believer. Unlike Cottrell he was paid to believe.

So he makes the following telling comment,

“it now seems that the European Union must take seriously the possible collapse of its Economic and Monetary Union.”
Coo, to read such words from such a man is quite something, but of course he reverts to type,
“This is such a Doomsday prospect for European integration that flat denial is the most tempting, and possibly the only appropriate response.”
So ostriches all round then John? Just by wishing it, economic reality won’t go away.

Stability pact

After reading this article, originally at your personal blog, I felt the urge to react. I'm not an economist (far from) and I miss my bookmarks at home on this rented laptop, but anyways.

A monetary union is not something like a hobby club you can join and leave as you wish. It requires something like concurrent economical fundamentals and state budget handling. That's where the Maastricht stability pact was for. And let's forget for a moment that many of the EU founding fathers (Italy, France, Germany) and Portugal violate the stability pact for a moment in terms of yearly state budget deficit. We are still on the same boat (even if it is the Titanic).

Whenever economies diverge in a monetary union, monetary transfers between regions have to take over. We, in Belgium, are very aware of that. We Flemish have to bleed for the Walloons for about 15 billion Euro yearly, and rising. I have an interesting article at home spelling out those kind of transfers within the US itself, in order to keep the Dollar union viable.

As I mentioned, I don't know a lot about economic conditions to enter a monetary club - but if you have any indications that a monetary union can be joined (or left) at wish by any economy whatsoever, I'd rather see some sound study about that.

Greetz, VH

As far as I can gather the

As far as I can gather the idea seems to be a variation on the original "hard ecu" dreamt up by John Major.
However much as I agree with your general analysis I do have a couple of thoughts.
Firstly if the boat on which you are on is heading for an iceburg, what do you do? Do you stay on board, dancing to the latest ragtime tunes, safe in the knowledge that everybody else will go down with you, or do you make for a lifeboat? Call me a coward, but I make for a lifeboat. Indeed, watching the construction of this great liner, we noticed that people were saying it was the greatest ship ever launched, that is was unsinkable. We were told that is clever new monocoque construction would ensure that its constituent parts could never come apart. But we were sceptical and kept aboard our old faithful tramp steamer of a currency. We still thank goodness for that decision.

Nothing like this experiment has been tried before as far as I know, thus there is no direct paper discussing that specific question, but you might try a paper from the IEA which dicussed historic currency unions - the Scandinavian example is particularly apt. (Title to follow)
As Christian Noyer recently said, and I paraphrase, "anybody can leave, ultimate soveriegnty still rests with national parliaments".

Positive aspects of the EUR merit mentioning

For example the Flemish economy has benefited enormously from currency stability. I think no one here is looking forward to a return of the early 80's when inflation ran (nearly) double digits and the Belgian Franc was devalued several times.

Also, there if very little proof that the lifeboats of independent currencies would actually be lifesaving. As the Economist recently noted the ECB intrest/inflation policy is surprisingly right. The dismal economic performance in old Europe is mainly due to bad politics from individual national governments (inflexible regulations in Germany and state interventionism in France for example) and in this the EU zone is a driver for reform and liberalism.

I hope I am wrong but your choice of words hints that you are looking for a way to paint the Euro as a failure to promote a (UK) domestic agenda.

A few good words

OK so it is possible that the Flemish economy has benefitted through the introduction of the Euro, and the related currency stability - I am no expert on the Flemish economy. However I am sorry that you feel that you have to pass responsibility for your economic success to a bunch of unaccountable foriegners. It is a pity that Flanders is not able to set its economic and fiscal & monetary policies to suit its own political/economic conditions. If those that create the playing field must be unaccountable I would far prefer them to be nationals of my country, who therefore are predisposed to do things to benefit my country.
Surely that is a perfectly reasonable and fair. I do not expect the Americans to set their interest rates to benefit the UK, and I would be purplexed and worried if they did. I do expect my political leaders to do things that are in my countries interests.
As to whether floating currencies harm or whether a fixed currency helps, there are arguements on both sides, the Irish have a rather different view than yours I expect, as dso the Portugese. The Eastern countries with their flat traxes and low corporation taxes arew seen as deeply irresponsible by the centre - all that so called harmful tax competition.
It is a truism that all are part of the project for their own purposes, France to shackle Germany, Germany to shackle itself, Italy beacuse nothing could be worse that its own political class, Finland due to a long land border with the Bear, UK, because we were an economic basket case in the early 70's. But please note, as you so correctly said, the problems are national, so in the case of the UK was the solution. I suspect it is national in other countries too, if the political classes only dared risk failure to achieve success.