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.

Ukip's Nigel Farage and Paul Nuttall. Photo: Getty
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Is the general election 2017 the end of Ukip?

Ukip led the way to Brexit, but now the party is on less than 10 per cent in the polls. 

Ukip could be finished. Ukip has only ever had two MPs, but it held an outside influence on politics: without it, we’d probably never have had the EU referendum. But Brexit has turned Ukip into a single-issue party without an issue. Ukip’s sole remaining MP, Douglas Carswell, left the party in March 2017, and told Sky News’ Adam Boulton that there was “no point” to the party anymore. 

Not everyone in Ukip has given up, though: Nigel Farage told Peston on Sunday that Ukip “will survive”, and current leader Paul Nuttall will be contesting a seat this year. But Ukip is standing in fewer constituencies than last time thanks to a shortage of both money and people. Who benefits if Ukip is finished? It’s likely to be the Tories. 

Is Ukip finished? 

What are Ukip's poll ratings?

Ukip’s poll ratings peaked in June 2016 at 16 per cent. Since the leave campaign’s success, that has steadily declined so that Ukip is going into the 2017 general election on 4 per cent, according to the latest polls. If the polls can be trusted, that’s a serious collapse.

Can Ukip get anymore MPs?

In the 2015 general election Ukip contested nearly every seat and got 13 per cent of the vote, making it the third biggest party (although is only returned one MP). Now Ukip is reportedly struggling to find candidates and could stand in as few as 100 seats. Ukip leader Paul Nuttall will stand in Boston and Skegness, but both ex-leader Nigel Farage and donor Arron Banks have ruled themselves out of running this time.

How many members does Ukip have?

Ukip’s membership declined from 45,994 at the 2015 general election to 39,000 in 2016. That’s a worrying sign for any political party, which relies on grassroots memberships to put in the campaigning legwork.

What does Ukip's decline mean for Labour and the Conservatives? 

The rise of Ukip took votes from both the Conservatives and Labour, with a nationalist message that appealed to disaffected voters from both right and left. But the decline of Ukip only seems to be helping the Conservatives. Stephen Bush has written about how in Wales voting Ukip seems to have been a gateway drug for traditional Labour voters who are now backing the mainstream right; so the voters Ukip took from the Conservatives are reverting to the Conservatives, and the ones they took from Labour are transferring to the Conservatives too.

Ukip might be finished as an electoral force, but its influence on the rest of British politics will be felt for many years yet. 

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