Currency unions usually fail – success only comes if they form a new country


                  There has been some surprise expressed that someone from the Office of Budget Responsibility confessed that monetary unions usually  fail. The correct statement is monetary unions usually fail, unless they help drive the creation of a new or united country. The US monetary union and the German monetary union were part of the federal constructions in those two emerging countries in the nineteenth century. The Latin Monetary Union and the Scandinavian monetary unions failed, because those countries did not complete or maintain political union.                   

                  The Latin currency union was created in 1865 by France, Belgium, Italy and Switzerland. Other countries joined later. The absence of a Central Bank and central monetary authority, the decision of the Papal See to issue devalued silver coins, the gap between silver and gold prices, and finally states’ borrowing needs for the First World War broke the Union, which was effectively ended by the War and given the last rites in 1927.

                     The Scandinavian currency union of Sweden, Denmark and Norway lasted from 1875 to 1914, with common banknotes from 1901.  The termination of Sweden and Norway’s politcal union in 1905, followed by the demands of war finance,  killed the monetary union.

                      Ireland’s monetary union with the UK was ended  on 30 March 1979. Ireland enjoyed a freely floating currency against sterling until entry into the Euro in 1999.


  1. lifelogic
    December 8, 2010

    Two or more governments and a single currency is always unlikely to work for long. It can only work if the governments and the economies remain in step over a long time. Given the poor level of most governance and the rapidly changing world and technology changes this is hardly likely to last very long. The exchange and interest rates will almost always be wrong for at least one of the economies.

    We still wait for Ken Clark, John Major and the rest to explain why on earth they felt the EURO would work and be a good thing and to apologise for the huge damage that has been wreaked.

    1. lifelogic
      December 8, 2010

      The BBC seems to think it is right to be endlessly running DAB radio adverts at this time of year. Potential buyers should note they can eat up to 50 times more batteries than analogue often have poor reception and the technology is virtually Dead And Buried already with podcasts and the internet. Anyway they are available on Freeview anyway. Please save your money and tell the BBC to stop running these and other annoying adverts.

      Do we not pay the licence so we can avoid adverts interrupting the usual arty/leftie BBC political agenda we all know so well.

      1. lifelogic
        December 8, 2010

        In short DAB radios are generally as pointless, as a current technology, as wind turbines, carbon capture, pv solar cells, and electric cars.

        Strangely also things the BBC seems to favour.

    2. nonny mouse
      December 8, 2010

      Ken Clarke yes, John Major no.

      Remember: it was John Major who gave us the opt-out to the Euro. He actually saved us from it!

      He gave us an opt-out to the social chapter too, but unfortunately certain Conservative rebels decided that they did not need to support their leader anymore and handed the next election to Labour, who then signed us up.

  2. Johnny Norfolk
    December 8, 2010

    Very interesting post thanks. It all ends in tears.

  3. Johnny Norfolk
    December 8, 2010

    Ps They never have any discussions on the BBC about thist sort of thing do they. They just do not want to look too deeply in case it comes up with the wrong answer for the BBC that is. ie we come out.

    You cannot continue with this sort of thing without the will of the people.

  4. Peter van Leeuwen
    December 8, 2010

    Neither the EU nor the eurozone could become one country. Wouldn’t the German constitutional court in Karlsruhe make sure that these remain hybrid (supranational plus intergovernmental) organizations? What would be the minimum requirements of integration to make for a common currency with a less than bleak future? Der Spiegel now suggests debt-restructuring and German opinions do matter nowadays. (,1518,733388,00.html)

  5. English Pensioner
    December 8, 2010

    It is a point that those Scots who want total independence from the UK seem to have overlooked, unless they expect to take over the management of Sterling from the UK treasury!

    1. John Page
      December 8, 2010

      Wouldn’t the SNP want to join the euro?

      Go for it, Scotland, you know it makes sense 🙂

  6. waramess
    December 8, 2010

    Is it possible that the Germans have finally woken up to this and realise that political union will mean the success of the German economy being diluted in order to support the weaker economies in Europe?

    Maybe , just maybe, the powers within that seek European union have just been rumbled.

  7. Mark
    December 8, 2010

    The Gold Standard was also a currency union.

  8. Gary
    December 8, 2010

    Debt based fiat currencies ALWAYS eventually fail, whether within a currency union or not. History has recorded these failures in black and white. By the iron cast laws of geometric pyramiding, debt based currency WILL always collapse, usually in a hyperinflation calamity for an independent country or in default collapse within a currency union.

  9. Denis Cooper
    December 8, 2010

    There’s an interesting official history

    “The Irish Pound: From Origins to EMU”


    From the abstract:

    “For most of this period, the Irish pound had a fixed link to sterling. It was only in the 1970s that this link was seriously questioned when it failed to deliver price stability.”

    “Although early experiences in the EMS were disappointing, membership eventually delivered low inflation, both in absolute terms and relative to the UK, and laid the foundations for the later move to EMU.”

    Written in the spring of 2003, the report ends on an optimistic note.

    “If the euro did have a role in causing higher inflation, it may be its weakness on foreign-exchange markets up to early 2002, rather than its physical introduction and the repricing of goods and services to euro, which should bear most of the blame.”

    “Now that the euro has strengthened, it may have a positive effect in dampening future price increases. Perhaps with EMU, as with the EMS, the benefits in terms of price stability will just take a little longer than expected to materialise.”

    The thing that strikes me about this article is that in the Introduction it states:

    “A theme running through the history of the Irish pound is a search for stability – stability in financial conditions and stability in prices.”

    but almost all of the subsequent references to “stability” are to “price stability”, and that “price stability” refers only to consumer prices and not to asset prices, without a single reference anywhere to the prices of houses or property in general.

    Yet ultimately it was a bubble in property prices which destroyed the financial stability of the private banks based in Ireland, and which has gone on to destroy the financial stability of the whole country thanks to the blanket guarantee of those private banks foolishly given by the Irish government under emergency conditions and under strong pressure from the ECB:

    My conclusion is that the euro always was and still is an intrinsically bad idea, but an even worse idea on the part of EU political class was that they should carry on fighting the last war, the war against consumer price inflation, when the new existential threat would emerge not from consumer but from asset price inflation, and to embed that single-minded obsession with consumer price inflation in the EU treaties through the mandate given to the ECB.

    Article 282.2 TFEU on page 167 here:

    “The ESCB shall be governed by the decision-making bodies of the European Central Bank. The primary objective of the ESCB shall be to maintain price stability. Without prejudice to that objective, it shall support the general economic policies in the Union in order to contribute to the achievement of the latter’s objectives.”

    Which Gordon Brown then replicated almost word for word in Section 11 of the Bank of England Act 1998, ensuring that even if we stayed outside the euro the Monetary Policy Committee would still take much the same narrow view as the Governing Council of the ECB.

    And I expect that if Ireland had stayed outside the euro then the Irish government would have done the same thing, because there was general agreement among the EU political class that this was the thing to do.

  10. Acorn
    December 8, 2010

    Now you are starting to worry me JR. Are we heading back to the Gold standard? Please can I refer you to this link; it appears to be the last one from this group.

    Down the page, posters referred to the impact of private debt expansion on the current crisis. This link adds to the discussion highlighting the loss of western productivity and perpetual global trade imbalances. If I didn’t know, I could guess that JR had written this.

    1. Denis Cooper
      December 8, 2010

      “While Dr. Richebächer had great respect for the ability of markets to guide resource allocation, during his time, he witnessed the transformation of incentive structures for both managers and investors toward short-term profitability, and he witnessed the corruption of profit and earnings per share measurement.”

      Maybe that’s because small direct shareholders have been largely displaced by “investors” who are the “managers” of various collective funds, and even if the individuals who are small direct shareholders are still mainly interested in the long-term performance of a company the incentive structures for the investment managers are often just as much geared towards short-term profitability as those for the company managers.

      As the major shareholders in a company it would be easy for the fund managers to insist that the company managers should not benefit from so-called “long term incentive plans” which run for merely three years, but instead their benefits should depend on the sustained performance of the company over a period which is long compared to the economic cycle, say thirty years, so that if the managers wreck the long-term prospects of the company in their search for short-term profits then they will suffer financially.

      But why should the fund managers voluntarily do that, when their own incentive schemes also orient them towards short-term performance? If that is ever to be done, and it should, then it will have to be imposed by law.

      1. David B
        December 8, 2010

        Well said.

        As a former small private shareholder in United Biscuits, Stakis and Powerscreens, I was buying for 30 years, but all these companies were sold out when they shouldn’t have been.

      2. waramess
        December 9, 2010

        Von Mises had an even greater respect for free markets and so far I can see no fault in that. We spend time mulling over what has happened to our so called great industries but forget that the unintended consequences of bygone years are simply surfacing.

        New industries start as cash eaters, slowly developing through an innovative stage when they produce returns for their owners and then, eventually become cash cows.

        This is a process that should be happening all the time in our economy but due to government interference and over-taxation our new and developing industries have slowed and we become offended when a foreign investor buys one of our cash cows, as happened in the case of Cadbury’s.

        We should be happy when this happens because it releases capital right now that we would have otherwise had to wait for.

        In this country we rarely see the development of new industries but one that we can all see for ourselves is Dyson.

        The only way we will see such developments on a large scale in the future is if government reduces in size and in cost. Then and only then will we see the regeneration of our regions and a healthy attitude to foreign investors wanting to buy up our cash cows and take short term views on their profitability

  11. Mike Stallard
    December 8, 2010

    Germany, Italy and the USA were all founded on bloody civil war.
    It is no use pretending that World War I and II were the foundation of a new Europe: they just weren’t.
    In Bangkok recently, I made some witty jest to a French party in French. They laughed politely. With Australians and Singaporeans, I chatted in our native tongue.
    When will we just stop pretending?

  12. Andrew Duffin
    December 9, 2010

    “Currency unions usually fail – success only comes if they form a new country”


    And that is exactly what the EU elites intend.

    Every crisis merely intensifies their determination and causes them to speed up their plans.

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