Europe’s politicians and their voters should pause for thought during the swelling crisis sweeping Euroland and reflect on the sobering fact that no monetary union has succeeded long-term without being underpinned by political union.
Successful examples include British monetary union between England and Scotland, which has operated since 1707, anchored by political union centered in London. A more recent example is German unification in 1990 that bound the former DDR with West Germany under a united political order.
Longer lasting is the 19th Century Italian monetary union which followed political union in 1861 and remained in place until Italy joined the single currency in the movement’s first wave of 1999.
And there have been examples where smaller countries have successfully bound their currencies together without recourse to political union, provided there has been genuine economic convergence, an example being the 1923 currency union established between Belgium and Luxembourg.
But where these supports have been lacking, failure ultimately resulted. One example was the Latin Monetary Union of the 19th Century, initially launched by France, Belgium, Italy and Switzerland in 1865 and then expanded in an attempt to unify the currencies of several European currencies into one that could be used in all member states. Another failed venture was the Scandinavian Monetary Union in the late 1800s between Sweden, Denmark and Norway.
The example that the European Monetary Union is trying to emulate is the U.S. Federal Reserve system -– established in 1913– as a centralized system. But, unlike the United States, the 27-nation European Union and the 16 euro-zone countries operating inside the bloc are not bound into one political unit.
Which way will this crisis -– and investors — push the euro-zone politicians?
“Watch This Space”, as they say.