The Euro is likely doomed.
I guess I saw this coming when they first pulled the common currency together. I had just read Jane Jacobs’ “Cities and the Wealth of Nations”.
Jacobs argued that currency should be local; that each currency supports one city at the expense of others, that a currency was a feedback mechanism supporting a tightly linked regional economy. When the city falls behind, its currency declines, facilitating exports and reducing imports, stimulating local contributions to the world. When the city gets ahead, its currency grows, facilitating imports and increasing the city’s role in the world’s cultural exchanges. Almost as if it were planned that way.
The trouble is that if more than one economic zone shares a currency, that the feedback mechanism fails completely until one city clearly dominates. At that point the feedback mechanism starts to work for the dominant city, increasing its dominance.
Jacobs, by the way, was a resident of Toronto, which I have, ever since reading the book, thought of as “Canada City”.
How does the US get around this? Mobility, I think. People move around, tolerate moving around, sacrifice deep connections for personal financial gain. It’s all effectively one city with rapidly shifting neighborhoods. There is very little that is local about America. When California becomes ungovernable, technology and entertainment move to Boston and Austin and Fhloston. The people follow the jobs. America is tightly economically coupled, so the currency serves well enough.
So when the Euro plans started, I was thinking “but, but, but Jane Jacobs”. I saw not a peep about this anywhere in the press. Both inside and outside Europe everybody thought it was a great idea, so that Europe could “compete” with America. But Europe cannot compete with America, because Europe has cultural roots worth preserving, and language and culture differences that prevent mobility even if people are willing to sacrifice their roots. In other words, Europe can never function as a single labor market. Which means that once you unify the currency, you will tend to promote a single, large, tightly coupled sub-economy and squash the others. Which is pretty much what Washington Post business columnist Steven Pearlstein is describing. He claims you can’t understand Greece’s failures without reference to Germany.
So the Rhine valley emerges as Euro city. It was probably the leading candidate in any case. And Jacobs turns out to be right in the end. Which spooks me, because I was right and practically everybody writing about business or economics was wrong. (In this case I can’t prove it. I don’t think I ever posted anything about this.)
Everybody but me thought the Euro idea was the bee’s knees. Maybe I should have said something, but I didn’t even have the audience I now have (Don’t get me wrong, I love you guys! I just want more!) so what good would it have done?
As far as I know Jacobs herself never said anything about the Euro, which surprises me.