To join or not to join: the European monetary union, often derided by critics, offers the unexpected benefit of enduring economic stability

In “Monetary independence is overrated and the euro is riding high”, Martin Sandbu explains why European monetary unity has proven to be more enduring than expected.

As Greece teetered on the edge of a debt default during the 2010s and other Southern European nations threatened to follow, few expected that the Euro area would expand to new countries.

Under the conventional view of monetary unions, their members, when confronting a financial crisis, lacked the policy options possessed by their non-currency club counterparts.  States with their own currencies, in the midst of an economic maelstrom, could simply devalue their way to prosperity.  With a currency worth less, the cost of its exports would also drop, instantly making them more competitive relative to those of jurisdictions which had not devalued.   A country lacking such control would be incapable of embarking on the same course of action.

For Sandhu, however, “monetary ‘independence’ in the sense of having one’s own floating currency is not all it is cracked up to be.”  This may be due to the fact that we inhabit a world with “long and complex cross-border supply chains.”  Thus, a depreciation decision may only boost export volumes if the entire product is sourced and manufactured within the state with a depreciating currency.

European monetary union, according to the author, gives its member states a sense of heft they would otherwise lack were they to try to go it on their own, in an economic world where the US Federal Reserve defines the basic agenda of what type of economic conditions (for example, whether loosening or tightening is on the agenda) are likely to prevail.

Italy, a Eurozone member and the United Kingdom, which has its own currency and recently left the European Union, illustrate the advantages and disadvantages of monetary independence.

On the one hand, Italy has been perennially faulted for its high debt and low growth.  Such factors, it is thought, make it a primary candidate for ejection from the European monetary project, assuming it does not trigger the destruction of the currency first.

Recently, as Sandhu notes, “it was not Italy, but the UK’s new populist government that badly rattled markets with irresponsible policymaking. Eventually, the Bank of England had to intervene to contain sovereign yields.”

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