The current crisis in the European Union is one of the most interesting economic and politic phenomenon in recent history. The plain fact is that the Union is still vulnerable to a complete break up of the common currency.
History does, however, repeat itself continually. There are lessons to be learned from past currency break ups. That is the subject of a newsletter from Standard Charted plc (LON:STAN). The article covers the breakup of currencies in the Soviet Union, Czechoslovakia, and Argentina.
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For Context, here’s a chart, from the report, on the probability a country will leave the Euro before the end of next year:
The cases are all very different. Argentina depegged from the dollar in 2001-2, Czechoslovakia went through an ordered breakup as the country divided into two separate states, and the Soviet Union’s currency system broke up because of the melt down following the dissolution of its political Union.
The analysis takes an interesting view of the Euro’s structure. Instead of being a true common currency, the Euro is seen as a multiple currency region, all under the same name. The weaker southern economies have their currencies pegged against the more stable northern economies.
The Soviet Union had a similar structure up until its break up in the early 1990s. The Rouble was the common currency of 15 Soviet Republics.It’s breakup was due to a lack of political will power to retain the common currency.
Czechoslovakia’s breakup grew out of a political will to divide the currencies and the politics of the country into two separate entities, the Czech Republic, and Slovakia. That happened in 1993.
The key take away from the past break ups of currencies is that it is political will rather than economic necessity that causes the fractures. Economic realities push a Union toward its crisis, but crises are solved or compounded by the political situations surrounding them.
A secondary lesson is the lack of power that small countries have in these crises. Smaller members are less likely to want to abandon a currency and delay the eventuality. This can clearly be seen in Greece’s present reluctance to abandon the single currency.
It falls to large and powerful actors to precipitate the dissolution of monetary unions. It was Russia’s movements that officially ended the Rouble as the Soviet currency, and it was the Czech in Czechoslovakia that called for that dissolution.
In Europe’s case that responsibility falls to Germany, and possibly Germany alone. There may be some close political ties with the low countries, and other northern European entities that have an effect, but Germany is by far the strongest actor.
If the currency is to finally dissolve it will be Germany’s decision as it was Russia’s. Greece may leave or be forced out before then, but for the currency bloc to be officially disbanded it will require a major decision from Berlin.
Political will is what founded the European single currency. It was not based on arguments in true economic reality, but rather in philosophical unity amobg the member states. Decades of European alliance taught them that they were stronger as one.
That unity may be drifting away. Look at the following charts on support for extreme political parties and European unity.
Despite the current dissent, it is philosophical and political unity that will decide the outcome of this crisis. The currency, and all of its members, underwent severe economic pain, almost unbearable under any other circumstances. The will has been there to withstand that pain. Time will tell if it’s there to heal it.
The Euro will exist on the basis of political will. Right now there seems less support for the currency that there is antipathy toward its dissolution. That is a worrying trend. This report holds a more optimistic view on the future of Europe’s currency. The summit in the coming days will teach us more.