Via FT alphaville and Paul Kedrosky comes this astonishing graph (pdf) from J.P. Morgan (click for big):
The x-axis is a measure of similarity between countries. It measures over 100 economic, social and political characteristics. Michael Cembalest, the reports 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 simliarity than the EU.
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Even a monetary union formed by simply picking the 13 countries beginning with the letter M would have more economic, social and political cohesion than the Eurozone does.
Cembalest concludes:
And still, Europe soldiers on, even as the rest of the world avoids monetary union in circumstances more favorable to it. What remains are political questions regarding how much inflation and fiscal transfer Germany can sustain; if a true fiscal union can be created, seen by some as indispensable to the Euro’s future; and how much austerity countries like Spain can take.
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As this is a road less traveled, it’s hard to know how it will turn out. It’s a tough road, and the chart helps explain why. Europe’s problem is not just one of public sector deficit spending differences, but also of deeper, more fundamental differences across its various private sector economies.
