Splitting America three-ways

If you refounded North America, how many currencies would you go for?

If you refounded North America, how many currencies would you go for? Whatever the answer, you probably wouldn't insist on Vancuver and Seattle being different.

The whole thing is reminicisent of the debate around Europe. In May, a JP Morgan research note revealed that the Eurozone was more diverse than pretty much every other possible monetary union:

The x-axis is a measure of similarity between countries. It measures over 100 economic, social and political characteristics. Michael Cembalest, the report's author, then applied this measure to 11 hypothetical monetary unions, as well as to the major countries of the Eurozone (he excluded smaller countries like Cyprus and Malta, but the results aren't that different if they are included; nor does the inclusion of Greece affect the results all that much).

What he finds is that many monetary unions that came close to existing exhibit far more similarity than the Eurozone. This includes Latin America, the Gulf states, and Central America. He then pushed it further: reconstituting several former empires, including the USSR, Ottoman Empire, and the British Empire in Africa, would also result in unions with more similarity than the EU.

Now, three academics from the Democritus University of Thrace have performed a similar analysis on the US and Canada, and found that – economically, at least – the present borders make little sense. E. Chrysanthidou, P. Gogas, and T. Papadimitrioy apply Robert Mundell's theory of Optimal Currency Areas (OCA) to the hypothetical issue of a north American currency union.

An OCA is an area where the macroeconomic conditions between two or more regions are suitable for creating a monetary union. All such unions have potential benefits – eliminating currency risk means that conditions are much more favourable for trade within the union – but they also have potential downsides, as the eurozone is demonstrating presently. If the various involved regions are similar enough, the benefits are likely to outweigh the risks.

The theory, which stems from the 1960s, was originally based on an examination by Mundell of the US and Canada, but it took on a more practical bent with proposition of the European Monetary Area. Since then, it has been largely applied to Europe and similar cases of actually-existing, or at least widely proposed, currency unions.

The authors return to the source, and attempt to work out, using two different methods (Correspondence Analysis and Hierarchical Cluster Analysis), what the groupings between the fifty US states and ten Canadian provinces ought to be.

The conclusion is not two, but three different countries, one on each coast and one in the middle:

The authors describe the differences:

The first one includes regions mainly from the East that are industrialized, and characterized by high levels of economic activity as this is measured by the macroeconomic variables used in our analysis.

The second part includes regions mainly from western US and Canada with diverse levels of economic activity and prosperity.

Finally, a third group of regions can be identified. This group includes a geographically diverse set of regions as it spans from east to west. The common factor though that links these regions is the relatively low level of economic prosperity as it is measured in our study in terms of income, growth, imports, exports, etc.

It would be rather awkward, to be sure – but no less awkward than the current arbitrary line drawn along the 49th parallel.

The US-Canada border. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Leader: Theresa May and the resurgence of the state

More than any of her recent predecessors, the Prime Minister seems willing to challenge the economic and political orthodoxies of the past 35 years.

Theresa May entered office in more tumultuous circumstances than any other prime minister since 1945. The UK’s vote to leave the European Union was a remarkable rebuke to the political and business establishment and an outcome for which few had prepared. Mrs May recognised that the result was more than a revolt against Brussels. It reflected a deeper alienation and discontent. Britain’s inequalities of wealth and opportunity, its regional imbalances and its distrusted political class all contributed to the Remain campaign’s ­defeat. As she said in her speech in Birmingham on 11 July: “Make no mistake, the referendum was a vote to leave the European Union, but it was also a vote for serious change.”

When the financial crisis struck in 2007-2008, David Cameron, then leader of the opposition, was caught out. His optimistic, liberal Conservative vision, predicated on permanent economic growth, was ill-suited to recession and his embrace of austerity tainted his “modernising” project. From that moment, the purpose of his premiership was never clear. At times, austerity was presented as an act of pragmatic bookkeeping; at others, as a quest to shrink the state permanently.

By contrast, although Mrs May cautiously supported Remain, the Leave vote reinforced, rather than contradicted, her world-view. As long ago as March 2013, in the speech that signalled her leadership ambitions, she spoke of the need to confront “vested interests in the private sector” and embrace “a more strategic role” for the state. Mrs May has long insisted on the need to limit free movement of people within the ­European Union, and anticipated the causes of the Leave vote. The referendum result made the national reckoning that she had desired inevitable.

More than any of her recent predecessors, the Prime Minister seems willing to challenge the economic and political orthodoxies of the past 35 years. She has promised worker representation on company boards, binding shareholder votes on executive pay, improved corporate governance and stricter controls on foreign takeovers.

The shadow chancellor, John McDonnell, has set the ­Labour Party on a similar course, stating in his conference speech that the “winds of globalisation” are “blowing against the belief in the free market and in favour of intervention”. He pointedly criticised governments which did not try to save their domestic steel industries as China dumped cheap steel on to global markets.

We welcome this new mood in politics. As John Gray wrote in our “New Times” special issue last week, by reasserting the role of the state as the final guarantor of social ­cohesion, Mrs May “has broken with the neoliberal model that has ruled British politics since the 1980s”.

The Prime Minister has avoided the hyperactive style of many new leaders, but she has deviated from David Cameron’s agenda in several crucial respects. The target of a national Budget surplus by 2020 was rightly jettisoned (although Mrs May has emphasised her commitment to “living within our means”). Chancellor Philip Hammond’s Autumn Statement on 23 November will be the first test of the government’s ­fiscal boldness. Historically low borrowing costs have strengthened the pre-existing case for infrastructure investment to support growth and spread prosperity.

The greatest political ­challenge facing Mrs May is to manage the divisions within her party. She and her government must maintain adequate access to the European single market, while also gaining meaningful control of immigration. Her statist economic leanings are already being resisted by the free-market fundamentalists on her benches. Like all prime ministers, Mrs May must balance the desire for clarity with the need for unity.

“Brexit means Brexit,” she has repeatedly stated, underlining her commitment to end the UK’s 43-year European
affair. If Mrs May is to be a successful and even transformative prime minister, she must also prove that “serious change” means serious change and a determination to create a society that does not only benefit the fortunate few. 

This article first appeared in the 29 September 2016 issue of the New Statesman, May’s new Tories