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EU: Monetary Union Is Neither A New Idea Nor Always Successful

  • Kathleen Moore

The banknotes and coins of Europe's single currency, the euro, became legal tender yesterday in 12 European Union countries. The historic changeover launched Europe's most widely used money since the Roman Empire. But there have been other, more recent, attempts to create monetary unions -- not all of them successful.

Prague, 2 January 2002 (RFE/RL) -- The 300 million people now using euro cash as they go about their everyday business are taking part in the largest monetary changeover in history.

Not since the silver denarius circulated across the Roman Empire 2,000 years ago has a single European currency enjoyed such a wide reach. There have been more recent attempts at monetary unity, but most have been short-lived.

John Chown of Britain has just finished a book on the history of monetary unions. He says a classic example was the Latin monetary union of the 1860s, which for several decades gave France, Belgium, Switzerland, Greece, Italy, and Bulgaria a common legal tender.

"The Latin monetary union was based on everyone adopting the French bi-metallic system, where silver and gold were presumed to have values in the ratio of 15.5 to one, which held until various problems...[arose] because the gold-silver ratio didn't remain constant," Chown says.

When the price of silver plummeted, that ratio jumped to 40 to one, sending the system into chaos.

In the 1870s, Sweden, Denmark, and Norway formed the Scandinavian monetary union, where gold coins struck in each country could circulate in the union area, but this system fell apart after World War I.

Napoleon, too, wanted to create a common European currency, writing to the King of Naples in 1807, "If you have money minted, I wish you to adopt the same denominations as French money. I have done the same thing with my kingdom in Italy. That way, there will be a uniform money throughout the whole of Europe, which will be a great advantage to trade."

The Austro-Hungarian empire adopted monetary unity, but that system, too, died, along with the empire itself, at the end of World War I.

Some argue that the gold standard -- in use by most major nations at the turn of the 20th century -- was, in effect, a single currency. Under this system, most countries' currencies were freely convertible into gold at a fixed rate.

But as Colin Robinson points out, the countries involved still kept their national currencies, as have those countries where the dollar or euro is today a second currency.

Robinson is the editorial director of London's Institute of Economic Affairs. He says that monetary unions have only been successful when they were political unions first, such as when Italy and Germany unified in the 19th century.

"The feature of all these has been that unless there was some form of political integration, in the sense that there was a government behind it, all these attempts at monetary union have failed. It's quite difficult to run a monetary union unless you have a single government in charge of the area in which the union takes place," Robinson says. "Clearly, you have to have a common monetary policy if you have a monetary union. You have to have the same interest rates for all the countries concerned, but probably you need in the end to move toward a common fiscal policy, harmonization of taxation -- all these kinds of things."

The United States is another example of a successful monetary union, adopted in 1789 along with its constitution. This took the power to issue currency away from individual states, although it was a long, drawn-out process.

Some critics of European Monetary Union have pointed out that the 12 euro-zone governments -- unlike the U.S., which has a large central budget -- still control individual national spending, which could pose a potential danger to the project.

But many do not relish the idea of relinquishing control of their public purse. Robinson says this political aspect goes a long way to explaining why there are still some strong anti-euro feelings in the United Kingdom, which along with Denmark and Sweden, has chosen not to adopt the single currency as of yet.

"I think it's a political project," Robinson says. "Many of the people who support monetary union in fact want closer political integration. One of the main reasons why the British have been skeptical about monetary union -- and all the public opinion polls show a big majority against giving up the pound -- is because many people see this as a further step on the road to political integration. They don't particularly want to move towards a single government in Europe."

Author Chown says one lesson learned from past experiments is that monetary unions can and do collapse, and that there is no real precedent for the scope of the EMU experiment. But he adds that European Monetary Union now has a momentum of its own. In fact, it's already been in effect -- except for notes and coins -- for three years, when the 12 countries' exchange rates were locked together.

"If it survives the next 15, 20 years, it will survive. The serious danger is that different countries have cycles out of line. The Irish need higher interest rates at the moment than the Germans, but they can't have them because of monetary union," Chown says. "The sheer political momentum behind monetary union means that some of these problems will be overcome. But if the politicians don't face up to them, there could be disaster."

There are moves afoot to create another monetary union in at least one other region of the world. Six Gulf states -- Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates -- plan to introduce a single currency by 2010.

But Robinson of London's Institute of Economic Affairs doesn't see a greater drive in general toward these forms of monetary unity: "I suppose if the euro was successful, there might be some further moves towards monetary unions, but I just don't think it's there at the moment."