I took a long hard look at a one-euro coin in my hand while I was on a train to Versailles from Paris. For a huge monetary policy controversy across the Eurozone, the coin does not look so special. It is a small unassuming bimetal. Not too many would take a second look at it. Everybody here in France uses it for mundane purposes. Yet, its link to Eurozone’s policy is there and is no small matter.
I was focusing on the coin to avoid thinking of somebody that I care a lot about. After awhile, I began to retrace the cause of the controversy with Eurozone and the weaknesses of monetary union in general. A question soon popped in my mind. Would some hard currency advocates — goldbugs and others — support a large monetary union?
A typical weakness of a large monetary union is its inflexible interest rate as set by its central bank.
A large area with diverse parts that economically grow or shrink differently. That demands different monetary policies and specifically, different interest rates to be pursued by different parts of the union. A monetary union prevents these different parts from pursuing individual rate however. There is only one rate by definition.
The politics between members of the union will inevitably decide the union’s single rate. Each representative at the table will promote the interest of the member who they represent.
The more diverse the members of the union, the harder it will be to achieve a consensus. It is hard because the rate cannot accommodate everybody easily, if ever.
The debilitating politics of a diverse monetary union discourages the rate from becoming flexible. It would be hard to change the interest rate at any one time, unless there is to be some kind of systemic shock that would make everybody to agree to some magnitude of rate change on top of individual needs, and unless the composition of the decision-making body is skewed to side that makes the body unrepresentative.
Through this, the central bank effectively loses control of the rate. This, I think, is a close equivalent of having a hard currency because the central bank loses its power to print money arbitrarily.
Given this, I think many advocates of hard currency will likely like the creation of a large and diverse monetary union. Or at least, they would prefer this to a normal fiat currency regime.
