We knew the euro was a bad idea in 1961. What went wrong?

The eurozone is emphatically not an optimal currency area.

Everyone knows this action-movie story: a heroic, war-scarred veteran is promoted to a prestigious desk job, reluctantly hanging up his rifle in the process. But then the state finds itself under threat and his superiors in the bureaucracy turn out to be grossly inept. Eventually, our hero, fearing for the lives of his men and the good of the country, tells them where they can stuff their desk job, picks up his rifle and leads the troops to an epic victory.

The start of this tale is similar to what has been playing out in the Eurozone over the past decade. Countries, hoping to join the safety, prosperity and exclusivity of the Eurozone, readily hung up their weapons of monetary policy, fiscal flexibility and money-printing. But now they need them again, and they're nowhere to be found.

The dangers of currency unions are not only now emerging: they have been a central part of international macroeconomics literature for over half a century, since Robert Mundell’s seminal paper (£) on "Optimal Currency Areas" (OCAs) in 1961.

What seems to have shocked the Eurogenitors is that this longstanding theory was actually right.

OCA theory highlights the costs and benefits of common currency zones and suggests criteria that all states should satisfy before considering their formation. Benefits include increased intra-zone trade, lowered transaction/conversion costs and increased competition through price transparency, while Costs are mainly concerned with lost flexibility. Countries in the zone no longer have the ability to adjust to asymmetric shocks, whether by externally devaluing via currency pr internally devaluing via inflation.

So, could we use OCA theory to retrospectively solve the Eurozone’s problems?

Sadly not. First, many of the criteria which Europe does not meet – hence the original incompatibility – can never be met by it. And second, the Eurozone has created new problems that OCA theory never envisaged. What started as asymmetric shocks – a banking crisis and property bubble bust – have become a massive symmetric attack across the whole region as unarmed sovereigns are left with no policies to defend themselves whilst their very solvency is called into question.

A good example of the Eurozone’s economic incompatibility can be found in Mundell’s first classic OCA criterion: labour mobility. This represents one of the most marked differences between US states and Eurozone countries. If unemployment rises in Detroit – say, because demand for cars falls – workers can move to a state where there is more demand for work, easing Detroit’s unemployment. And Americans do move, frequently. The same is not true of Europe, partly because of the heterogeneity of labour markets but mainly due to culture and, most importantly, language.

So, would a solution to the Euro crisis be to teach everyone, say, German? Despite the obvious historical faux pas of imposing Deutsche Uber Alles, this would raise employment in the short run for Germans (as teachers) – the opposite of what is needed. Teaching English is out for the same reason, and besides, anything that promotes the meddling Brits would be shot down by the Europeans at the helm.

So, how about Spanish? Great idea. Youth unemployment in Spain is a whopping 52 per cent, and teaching your native language requires only a short course that the indignados could pick up in a few weeks. Eurozone-backed free Spanish lessons would ease unemployment (and the associated social benefits) in Spain, whilst the increased skills would further knowledge transfer across the continent and allow for better trade and business links with the fast-growing economies of South America as well as the US (over 10 per cent of the population are Hispanophones).

But of course this is folly. The Italians/Greek/Portuguese would ask, "why not us"? The French would be furieux; to many French diplomats, the very raison d’être of the European project was to spread the French language in defiance of English. They are not about to sponsor an attack on their langue maternelle from over the Pyrenees or anywhere else.

In fact, try though we might to come up with ingenious solutions, microeconomic reforms will not save the Eurozone. No matter what language you put it in, investors can see the current crisis for what it really is: a vote of no confidence in the currency itself.

But OCA theory may have one last bullet in the chamber. Another founding father of OCA theory, Peter Kenen, highlighted in a 1969 paper the need for fiscal integration.

For example, a demand shock in Detroit would not cause a fundamental questioning of the dollar. Instead, Washington would increase transfers to Motor City to allow it to rebalance without cutting state-level consumption and the Treasury would continue to borrow at low rates reflecting the might of the US economy as a whole.

Joining the Euro for many countries has meant surrendering their economic self-determination even while the bazooka-holding Germans have ignored the pressing need for action in the on-going war of attrition against their shared currency.

The Banking Union agreed to on June 27th may sever the link between insolvent banks and insolvent governments but the risk to the currency remains, and thus the unsustainable borrowing costs for peripheral countries will continue.

Everyone can see what Germany’s role in this tale is: either agree to fiscal integration, debt mutualisation and a genuine guarantee of the currency (the markets will know otherwise) or unlock the arsenal, give the Eurozone countries back their self-determination and bring the project to its conclusion.

The story of the European project has been one of peace, prosperity and co-operation for decades, but it is time the next chapter was written.

Robert Mundell, who knew the euro was a bad idea fifty years ago. Photograph: Getty Images

Dom Boyle is a British economist.

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Northern Ireland's election: Will Arlene Foster pay the price for a domestic scandal?

The wind is in Sinn Féin's sails. But both parties have to work together after the poll. 

Will voters use the forthcoming elections to the Northern Ireland assembly to punish ministerial incompetence?

After all, these elections are all about the Democratic Unionists’ Arlene Foster and her disastrous mishandling of the Renewable Heat Incentive scheme, the energy subsidy she previously introduced as enterprise minister without putting cost controls in place, thus racking-up a £500m liability for the Northern Ireland Executive.

Her refusal to stand aside as First Minister and allow an independent investigation triggered a sequence of events that collapsed the power-sharing executive that runs Northern Ireland, necessitating this poll.

The electorate offers its verdict on Thursday.

So far, there has been a predictable rhythm to the campaign. Cautious and insular, the parties have all been here before and know how to harvest their vote. Elections in Northern Ireland are effectively a race to see who can shore up their core the most, (made harder by the overall reduction in seats from 108 to 90 across 18 multi-member constituencies).

Foster knows she is fighting for her political life. Her woeful handling of the RHI scandal, exposed her severe limitations as a politician. Brittle and stubborn, she further damaged her reputation at the DUP’s manifesto launch by refusing to take any questions from journalists on the basis she had "man flu".

Her pitch was a sectarian "Project Fear" warning that Sinn Fein might overtake the DUP as the largest party and push for an early referendum on Irish unity. Sinn Féin president Gerry Adams joked after the launch on Twitter: "Just for the record, I didn't give Arlene the flu." 

Foster’s campaign might be ugly, but in Northern Ireland’s hyper-tribal polity, it could prove effective. If the DUP suffers a reversal, however, her colleagues may yet think twice about re-nominating her for First Minister/deputy First Minister.

Meanwhile, as Sinn Féin’s new "leader in the North" Michelle O’Neill finds herself in exactly the same situation as Foster was 12 months ago at the last assembly elections - taking over from a male predecessor who had been a mainstay of the political process for years.

O’Neill is so far proving formidable. She benefits from the fact the wind is blowing in Sinn Féin’s sails. After all, the reasons for this election - the DUP’s incompetence - will play well among republicans and nationalists. 

Sinn Féin’s pitch is therefore about ensuring "equality, respect and integrity", with O’Neill claiming this is "the most important election since the Good Friday Agreement". The Shinners are pushing for the strongest possible mandate in what O’Neill describes as the "short, sharp negotiation" that will take place after the elections. She says she doesn’t want a new agreement, "just the implementation of previous ones".

In terms of the other parties, Mike Nesbitt, a former television journalist turned leader of the Ulster Unionists, deserves credit for trying to appeal beyond the tribe. He has offered his second preference vote to the nationalist Social Democratic and Labour party. Tactically, he has to try something to dislodge the UUP from the political sediment.

Both the UUP and SDLP are essentially fighting for relevance in these elections. They constantly claim the electorate has had enough of the SF-DUP duopoly and wants change, it’s just that the voters never vote for it. 

Following Thursday’s results comes the hard bargaining, if the parties are to get power-sharing up and running again and avoid a period of direct rule from the Northern Ireland Office. Both Foster and O’Neill need to be seen to strike a hard bargain. Foster will be desperate to claim she is still in control of events. O’Neill, the newcomer, will want to show she is no pushover.

If she is smart, Foster will  push for an early restoration of the executive and try to put this mess behind her. If, on the other hand, there is a lengthy delay, the election could become a running sore. After all, as the DUP may yet have to be reminded, power-sharing lies at the heart of the Good Friday Agreement

Kevin Meagher is associate editor of Labour Uncut and a former special adviser at the Northern Ireland office.