All the talk about Greece and the European Union (EU) of late has reminded me of my vehement dislike of monetary unions such as the EU. Sure there could be many benefits to having a monetary union provided one could be implemented effectively but to implement an effective monetary union is akin to implementing a utopian society – an endeavour that is doomed to fail!
Like the concept of a utopia, a monetary union such as the EU is supposed to provide its constituents with an environment where everyone can thrive; a pact where people can live, work, and operate internationally without the frictional cost that usually comes with cross border dealings. In effect, a monetary union is like the amalgamation of all the constituent countries to form one big united country where people and businesses of the constituent countries are free to move and operate anywhere within the union as though they are moving and operating within the same country.
However, the benefits of a monetary union are not without their costs. In particular, one of the most significant costs of a monetary union is that each country gives up their control of monetary policy to a central body within the union. While this is a necessary requirement for a monetary union, without which parity in the common currency between the constituent countries cannot be attained, it also severely limits the tools available to each country for the management of their economy.
If the monetary union is effective, this is arguably not a problem. However, for a monetary union to be effective, a number of conditions must be satisfied, as put forward by Robert Mundell in the 1960s – trade integration, similarities in industrial sectors, and flexibility and mobility. Put simply, the countries in a monetary union needs to be more or less equal so that the effects of any shocks or stimulus to the union has the same impact on all countries in the union. However, given the deep-rooted inherent differences between countries, satisfying these conditions required of an effective monetary union is extremely difficult, if not impossible.
Considering the above, it is not surprising that the EU, or rather parts of the EU, is struggling to recover from recent economic crises. Fundamentally, the issue is that the inherent differences between the countries in the EU are making it difficult for the conditions of an effective monetary union to be satisfied. And given individual countries no longer have access to their own monetary policy to influence their economy, they are reliant on the European Central Bank’s (ECB) monetary policy to drive changes in their economy. However, given the differences in each country, the effect of the ECB’s monetary policy on each country will be different. As such, some countries will gain and some will lose from any monetary policy stance that the ECB adopts – and at this moment in time, Greece appears to have everything to lose and nothing to gain from the monetary policy stance of the ECB.
However, all is not lost with for Greece. While it does not have access to monetary policy to dig itself out of its hole, it still has some levers such as fiscal policy to influence its economy. The question is how far is Greece willing to go with its fiscal policy to influence its economy? Judging by its resistance to its creditors’ demands, which are effectively demands on Greece to alter its fiscal policy, the answer is likely not very far.
So, what does all this mean? It goes back to my earlier point that trying to implement an effective monetary union is akin to trying to implement a utopian society – an endeavour that is doomed to fail! If you ask me, I’d rather have the ability to influence my economy as I see fit than to have my hands tied behind my back for the opportunity to get a piece of the largely illusory benefits of an idealistic monetary union.