A s many commentators have rightly observed, the euro experiment is at a crossroads. Either the eurozone will deepen into a fiscal union, or the weak members will be forced to break off. But the euro experiment has also brought us to a crossroads in the whole international monetary system. Will our grandchildren inherit a world with a huge number of national currencies, or a very small number of multi-country currencies?
If the euro survives and goes on to assume co-reserve currency status with the dollar, surely there will eventually be a strong trend towards consolidation elsewhere. Other blocs will form to mimic the euro’s success. They will aim to enjoy lower interest rates, and greater resilience to financial crises. Perhaps, for example, Canada and Mexico will eventually form a North American currency bloc with the US, possibly extending to include a significant part of Latin America. China and Japan could put aside their differences and form the heart of a third major trading bloc in Asia. Indeed, until the recent financial crisis, it was hard for most researchers to imagine things any other way, save perhaps for idealists who believed the world should adopt a single world currency. (I doubt this would be a desirable outcome, as some currency competition is important as a constraint on the effects of inflation.)
Yet if the euro is torn by centrifugal force, perhaps because European leaders are constitutionally incapable of making tough decisions on how to radically trim periphery debt burdens, it could take a great many decades before any other region attempts a similarly ambitious programme. The 1980s and 1990s taught us that for countries with open capital markets, fixed exchange rates are a mirage that cannot be indefinitely sustained. If the euro goes the way of the Argentine currency peg, the noughts and tens – the first decades of the 21st century – will be viewed as teaching the same lesson about more radical currency marriages. Sovereignty and currency co-habitation do not mix.