Thursday


It continues to be a fascinating exercise to read the Financial Times each day to see the ongoing machinations and maneuvering around the fate and future of the Eurozone currency union. Some say it will be held together; others say Greece and a few others will leave the currency union and things will be fine; there are a few who insist that a Greek exit means that the currency union will collapse altogether. I have myself added to this lengthy debate with several posts, such as What would a rump Eurozone look like? and The Economic Future of Europe.


Euro area Member States
Non-euro area Member States
Member States with an opt-out

I have suggested that with the departure of marginal economies (nation-states that never were peer-competitors to the core Eurozone economies) will leave the Euro stronger than before, and with prospects for a distant futurity. The proof of this is that, while the Euro is down on international currency markets, it has not been aggressively bid down in a scenario such as would be the case if currency traders expected the Euro to be circling the drain. In comparison to other major world currencies, the Euro remains today in a stronger position than when it was first issued.


Which countries have adopted the euro – and when?


However, some of the recent arguments I have read suggesting that the Eurozone cannot continue to exist in its current form post-Greek departure have in them a hard kernel of truth. Some of this is semantics: if we say that the Euro cannot continue in its current form, all we are saying is that it could continue in an altered form. Read a little deeper in the context, though, and it becomes apparent that there rather more pessimism about the Euro than is captured by a mere semantic shift from the Euro based in the current Eurozone and a Euro based in a Eurozone minus Greece, Portugal, Spain, Italy, and Ireland.

One of the reasons that the Euro is not being aggressively bid down on international currency markets is that the core Eurozone economies have strong fundamentals, and these fundamentals are not going to disappear in a puff of smoke even if the Euro evaporates. Germany and France will continue to do business in some currency or other, and while their economies would take a major hit from the demise of the currency union, their fundamentals will ensure that they will recover and eventually resume economic expansion.

What I would like to suggest is that the Eurozone adopt a policy of economic shock therapy and take the bad news all at once, on the principle that a ratcheting downward of the Eurozone would create economic chaos and uncertainly each time a nation-state departed the currency union (a consequence of European leaders’ failure to see far enough down the road to make institutional provisions for both entry into and exit from the Eurozone). Europe could conceivably perpetuate the crisis of the Eurozone for a decade if marginal member nation-states fell away once every year or two. This would be a worst-case scenario that would set back the whole of the European economy for more than a decade as ongoing adjustments are made in the wake of further departures.

However, such a radical shock therapy need not mean the abandonment of some kind of currency union in Europe. I have suggested previously that the nation-states of Northern Europe that are on a more-or-less equal economic footing, and with more-or-less comparable social institutions and expectations, can work together well within a currency union in which tough economic standards are expected, enforced, and adhered to. Such a currency union of Northern Europe would roughly correspond to the extent of the Hanseatic League, which was a medieval trading group that flourish in the later middle ages and the early modern period — an international trading corporation before there was any such legal entity as a corporation or any such political entity as a nation-state (and therefore no sense of “internationalism” as we think of it today).

The Extent of the Hanseatic League in the late Middle Ages and Early Modern period.

A currency union in Northern Europe that roughly approximated the geographical region that once comprised the Hanseatic League would, I think, not only be sustainable, but would be a benefit to its members in the same way that being part of the Hanseatic League was a benefit to these late medieval and early modern merchants with their trading depots around the Baltic Sea. Rather than being dragged backward by non-compliant members, a union of economic peers would serve to pull each other forward. Strong provisions in any treaty governing such a union could ensure this not only by having a clearly defined legal process for departure from the union, but also, and as importantly, a clearly defined legal process to eject non-compliant members from the union.

In the map of Europe that I have colored below I have identified in a bright (Euro!) blue those nation-states that could probably cooperate in a strong Northern European currency union. This union could be “strong” in terms of its exclusivity and its willingness to exclude members that failed to maintain acceptable macro-economic targets. Membership would be a privilege, not a right; in the initial enthusiasm for the Euro, the sense of exclusivity was lost, which sentiment standing in for enforceable macro-economic standards. This Northern European currency union could be called, in deference to history, the Hansazone, and the currency could be called the “Hansa.” If the Swedes and the English could be persuaded to join too, all the better. This would work; the Eurozone as it is now constituted does not work.

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A “Hansazone” for a currency union in Northern Europe.

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Grand Strategy Annex

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