Inevitability vs bad luck and currency unions

There’s been so much discussion about the Euro recently, with many people offering views on how we came to be where we are.

I’d suggest that giving the limitations of the Euro structure, the ECB mandate and most critically, the failure of the Euro region to sufficiently meet the characteristics of an Optimum Currency Area (OCA), the problems we are having now were inevitable.

The timing of the event may have been uncertain, but the probability of it happening was pretty close to 100%. Yes, it’s easy to say that now and I wasn’t saying it before, but consider these three issues:

  1. Banking crises happen all the time. Regularly.  This has been happening for hundreds of years as discussed in detail in the fantastic book, “This time it’s different” by Reinhart and Rogoff. Greece has had two banking crises since 1800, Denmark has had 10, somehow France managed 15 separate banking crises and the international financial centre, the UK, clocked up 12 over what is a relatively short period.  Before we get too Euro-pessimistic, the US managed an impressive 13 over that same period.
  2. Sovereign default and financial crisis is a regular, recurring feature of our society.  Since 1800, Greece has defaulted/rescheduled debt 5 separate times (1826, 1843, 1860, 1893 and 1932) and has spent 50.6% of the period in default or rescheduling of debt. Spain has defaulted 13 times in the same period. While we’re at it, France has defaulted 8 times and even the Netherlands has defaulted once and spent nearly 7% of the period in default or rescheduling.  (same reference as above).
  3. The Euro area does not have good labour mobility (language and culture differs strongly), does not have a fiscal union or lender of last resort and has economies with different characteristics.  This is not a system built to withstand sovereign debt or banking crises.

Now, ask yourself, is East Africa ready for a currency union?

Is the GCC ready for a currency union (pdf)?  More on this in the months and years to come I’m sure, on this blog and everywhere else.