Historical Economics: Don’t Trash the Euro

The Greek debt crisis has been a field day for important American economists. Their condescension is evident with headlines like “They told you so: Economists were Right to Doubt the Euro” in the New York Times piece by Gregory Mankiw. Paul Krugman has uncompromisingly scolded the Europeans for attempting to have a single currency without “proper underlying economic conditions.” Krugman admonishes European leaders for being, “self-indulgent politicians [who have] spent a quarter-century trying to run Europe on the basis of fantasy economics.” Krugman subscribes to the idea that the problems today are, as Martin Feldstein explained, “the inevitable consequence of imposing a single currency on a very heterogeneous group of countries.”

Apparently, Krugman’s historical amnesia is showing. Single currencies have never been the product of amicable debates and optimal economic solutions. The U.S. dollar did not emerge in a peaceful discussion while the country enjoyed economic prosperity. During the Civil War, Abraham Lincoln’s Republican Party pushed the legislation through to give the federal government exclusive currency rights in 1863. The only reason the legislation passed was because the Southern legislators, who had repeatedly opposed any form of centralized power, had seceded from the union. The Union wanted a common currency for the sake of the war effort. As the country disintegrated into war, the United States greenback was born. Hard fought political battles, not fantasy economics, created a unified currency amongst heterogeneous states.

Money is contentious by its very nature. As a result, coming up with a singular form of currency is the result of political consolidation of power. European leaders have not been “stupid or self indulgent” by deciding to pursue the euro, “without fiscal union of strong Europe-level democracy. They just cared more about politics and international security than economics.” After Europe rebuilt itself from the Cold War, and Germany rehabilitated itself from reunification, they hoped that a, “a strong euro anchored in an independent European Central Bank located in Frankfurt and built on a commitment to protecting the stability of the currency, would help resolve the problems of currency depreciation, spiraling inflation, and economic instability.”

History is not a collection of smooth transitions and easy agreements. It is a series of struggles, hard political bargaining, and fights to reshape politics. Even victories are sometimes messy and inefficient, but with hope for improvement by future leaders. The U.S. dollar emerged over time and through struggle, and the same may still be true of the euro.

Our advisors at Apex understand that economics, like history, is a complicated blend of forces. We cannot predict the future, but we pride ourselves on never rushing to conclusions. Our responsible and rational approach to fiscal policy helps us avoid the easy mistakes, and maintain the wealth of our families and yours. How does the euro’s evolution impact your wealth? Get in touch with one of our advisors today to find out.