04/05/2006 3:19:41 pm
Expanding Euro. In The Economist, the Charlemagne column was devoted to the euro lately. In practice, the euro has existed for seven years now, and in the shape of notes and coins four years. Charlemagne points out that indeed the euro has established itself as a credible, global, currency. In short: the euro works fine as a currency, better than most expected.

The public deficits in many of the euro countries breach the allowed limit, but they are low compared to both the US and European history. Indeed, The Economist has previously pointed out that the limit shouldn?t be there at all, and that fiscal flexibility is essential when the monetary policy is one and the same.

But the column also claims that the big expectations concerning various long-term side-effects of the single currency have not materialised. And indeed, looking at the growth rates of the euro countries and the pace of reform, who couldn?t agree? The problem is that we don?t know what would have happened during these times without the euro, what is the counter-factual story?

Quite a few politicians have wished to reclaim political power over monetary policy in order to devaluate and generally have a more Keynesian monetary policy. That has now been impossible, but what would have happened if they had had national currencies? And at least now there is a debate about reform and some steps in the right direction.

And we have a massive wave of protectionism over Europe. What would have happened to the single market during these times without the euro? How would national, keynesian, monetary policies have been countered by other countries? With even more subsidies to old companies? With tarriffs and quotas within Europe?

We will never know for sure. But what we do know is that the time for several countries to join the euro has come. Slovenia will be number thirteen from January next year. In 2008, others will follow. The currency is expanding, which increases the benefits of adopting it. An ideal in the world of ideas might be private currencies, but in the real world a big currency shared by many is a good and obviously appealing alternative.