There is no doubt that having a common currency like the Euro has been a net benefit for most members, most of the time. For a net exporting country like Germany it eliminates one barrier (currency fluctuations and exchange costs) to trade. For a small economy like Ireland it can also avoid the wild fluctuations in currency value experienced by our previous currency, the punt, which could be gamed by a medium sized hedge fund. Businesses crave predictability and eliminating exchange rate fluctuations and costs helps provide that.

On the downside, a 'one size fits all' currency exchange rate with outside currencies and ECB monetary policy can be wildly inappropriate for some countries some of the time. The low interest rates required to fund German re-unification also boosted an Irish property bubble which led, in significant part, to the Celtic Tiger crash.

Then again, there is no way a small economy like Ireland could now borrow at near 0% if we had our own currency. Currency traders (and hedge fund) knowledge of smaller economies is patchy at best and there will always be a risk premium attached to borrowing in a smaller currency.

Greece should, of course, never have been allowed to join the Euro at all. It's structural deficits (and false accounting) were bad enough even when it did have its own currency. The Euro brought in an era of cheap credit and orgy of borrowing that would never have been possible with the Drachma. It's introduction required the adoption of Germanic disciplines and controls on borrowing that simply wasn't part of the culture. Interestingly Greece has decided to stick with the Euro even after all the pain it endured. If you are a trading nation heavily dependent on tourism having a common currency with your customer base has a lot of attractions. Tourists can get their cash at any ATM with minimal if any transaction costs (although banks have been trying to re-introduce them).

Italy is the really hard case. It has suffered a structural relative economic decline ever since it joined the Euro. Whether this would have happened in any case due to Asian competition for much of its industry is hard for me, as an outsider, to judge. But there is no doubt that the value of the Euro - too low for Germany, too high for Italy - didn't help. Draghi's policies helped to reduce the cost of its huge debt pile but didn't solve the underlying problem.

I am unconvinced that continually devaluing your currency or regularly defaulting on debts a la Argentina is any more viable a strategy even if it has its short term attractions. "Once off" devaluations or debt defaults have a habit of recurring as they tend not to to resolve underlying issues. One way or the other, the problem of competitiveness has to be addressed, if you are going to allow relatively open trade on a global basis. In any case the problems caused by trying to exit the Euro could make Brexit look like a walk in the park.

Varoufakis is right to criticise the moralistic northern European habit of ascribing virtue to lenders and fecklessness to borrowers. Every lender needs a borrower and every net exporter needs a net importer. Having a common currency and interest rate regime reduces the tools policymakers have to correct those imbalances which would normally be "managed" via currency devaluations and or interest rate differentials both of which can be painful, but perhaps not as painful as prolonged deflation.

In practice, wage rate and public service level differentials are now doing much of the work of adjusting for differences in competitiveness. Again this has little to do do with virtuous work ethics or public sector efficiencies and a lot to do with how well positioned an economy is to take advantage of economies of scale, technological innovation, market dominance and high margin industries like financial services and pharmaceuticals. It doesn't help social cohesion either at regional or international level within the EU when this results in even greater inequalities and imbalances.

Debt mutualisation could improve cohesion and reduce the total cost of borrowing by creating economies of scale and reducing perceived lender risk but does little to address these underlying structural imbalances. The suspicion in net surplus countries will always be that any interest cost reduction for high deficit countries will be at their cost either through reduced income on their savings, or an increase on their cost of borrowing relative to what their own national bonds would have cost.

But it doesn't have to be an either or. The issue of a mutual EU wide "Corona bond" to fund specific pandemic related costs to a set maximum value in any one economy could be an important demonstration of solidarity while not replacing national bonds for everything else. It would also demonstrate that some EU members are not seeking to benefit from the misfortune of others by charging the high interest rates associated with some previous alleged "bail-out" funds. Italy wouldn't be able to refinance its 135% debt GDP ration using Corona bonds, but at least any additional borrowing necessitated by the pandemic would be at the lowest possible rate currently around 0%.

I do not pretend to fully understand the issues around "helicopter money" and the ECB simply printing huge amounts of cash and giving it to member states or its citizens at a time of crisis. Certainly the traditional fear of it generating inflation hardly seems to be  "le problème du jour". It could be a short term solution, and certainly be preferable to default, but we do not know where the limits of such a policy lie.

Ultimately, a stable monetary union requires a stable political Union and at least a degree of fiscal union which can replace the other stabilisers of differential currency and interest rates that a monetary union removes. If the current management of the pandemic teaches us anything, we are a long way off that in the EU at the moment. Health care is still primarily a national, and often a regional competency. Perhaps one way of progressing a fiscal union is to expand the role, budget and scope of the EU in public healthcare, pandemic preparedness and management, and pharmaceutical and medtech research and procurement. Viruses don't respect boundaries, and neither should out health care systems.


Index of Frank's Diaries