Monday, 6th October 2008

The financial crisis has exposed the fundamental flaws in the idea of a European single currency, writes Tim Worstall.

Put simply, monetary unions don't last in the long term without political union. That means the current situation is unsustainable. As UKIP MEP John Whittaker has pointed out, the interest rate on Italian government bonds is nearly 1% higher than that on similar German ones.

This is the markets insisting either that Italy is likely to go bust as a country or to leave the euro.

The countries in the euro thus need to either go forward to full political union or they need to draw back and leave the monetary union.

But, as just about every economist is saying (Charles Goodhart being a decent example), the countries and economies of the euro countries are simply too different for even full political union to work to the advantage of all.

Thus the current events seem likely to lead to the break up of the euro as a currency.

The original mistake can be seen by referring to the United States. Certainly, they started to issue dollars as soon as they were independent, but it wasn't until nearly a century later that the dollar became the only currency. In the interim, there were State currencies as well as private ones issued by banks...very like John Major's "hard ecu" plan that was so derided.

The US got on with building a country and brought in the currency later: the EU bureaucrats did this the wrong way around, creating the currency and thinking that it would lead to the building of a country.

No, this isn't the only thing going wrong in the financial markets at the moment, but it is most certainly making the European problems worse.

Contagion could fracture the euro zone: Read Larry Elliott in The Guardian

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