Euronomics: Euro Tragedy, A Drama in Nine Acts review: Impossible to undo, and impossible to fix - by Ashoka Mody

Celebrations for the 20th anniversary of Europe's common currency, the euro, are due in January and they will be subdued. The common currency almost came apart in the aftermath of the 2008 financial crisis and its vulnerability was baked into the design.

Ashoka Mody, who headed the IMF mission to Ireland during the subsequent Troika programme, recounts the genesis of the misbegotten project in this comprehensive study. He argues that the common currency was poorly designed and poorly managed in the years following the financial crash.

The eurosystem masquerades as ''Economic and Monetary Union'', the preferred moniker invariably employed by its defenders. But it is not a true monetary union even after the grudging repairs implemented since the crisis years from 2010 onwards. The United States is a full-blown monetary union, with a significant federal budget, a federally-issued safe asset, centralised bank supervision and a federal system of deposit insurance. If the banks go bust in Texas, the government of Texas does not have to pick up the pieces: the feds do the job. Nobody worries that the Texas dollar (deposits in bank branches in Texas) might come to be worth less than real dollars in New York or Massachusetts. Nor can the governor of Texas be threatened with expulsion from the dollar zone unless unsecured creditors of bust Texas banks are rescued by Texas taxpayers.

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European Economy: The Euro: Why Joseph Stiglitz Is Wrong - by Hermance Triay

Joseph Stiglitz, American economist and winner of the Nobel Prize in Economics, has come out with a new book, The Euro: How a Common Currency Threatens the Future of Europe. In recent weeks Stiglitz has appeared in several features in the press, advocating «a smooth exit» from the euro. Still, he expects «the end of the single currency does not mean the end of the European project.» That position, however, betrays a deep misapprehension of the realities of Europe.

Like most American economists, who hold strongly to the theory of «optimum currency areas», Joseph Stiglitz has been sharply critical of the single currency project from the outset, back in the 1990s. The idea of optimum currency areas was first explored in the early 1960s by Canadian Robert Mundell, who won the Nobel Prize in Economics in 1999 for his studies. For an area to have an interest in adopting a single currency, Mundell wrote, it had to meet a number of preconditions: high mobility of factors of production (capital and labour), predominance of symmetric shocks (concordance of business cycles among countries), significant fiscal transfers, and homogenous collective preferences among the citizens of that area.

In many ways, the future eurozone did not meet these requirements. But, as often happens with theoretical approaches, no area will probably ever meet all of such criteria: an «optimum currency area» can, in practice, hardly ever be anything other than an area that has already had a single currency for several decades.

Robert Mundell himself, incidentally, has never considered that his theories actually implied that a single European currency is impossible or undesirable. He has actively supported the single currency project, with which he has been regularly associated since the 1970s, although he has also often cricitised the positions defended by German politicians in the pursuit of it.

Joseph Stiglitz, American economist and winner of the Nobel Prize in Economics, has come out with a new book, The Euro: How a Common Currency Threatens the Future of Europe. In recent weeks Stiglitz has appeared in several features in the press, advocating «a smooth exit» from the euro. Still, he expects «the end of the single currency does not mean the end of the European project.» That position, however, betrays a deep misapprehension of the realities of Europe.

Like most American economists, who hold strongly to the theory of «optimum currency areas», Joseph Stiglitz has been sharply critical of the single currency project from the outset, back in the 1990s. The idea of optimum currency areas was first explored in the early 1960s by Canadian Robert Mundell, who won the Nobel Prize in Economics in 1999 for his studies. For an area to have an interest in adopting a single currency, Mundell wrote, it had to meet a number of preconditions: high mobility of factors of production (capital and labour), predominance of symmetric shocks (concordance of business cycles among countries), significant fiscal transfers, and homogenous collective preferences among the citizens of that area.

In many ways, the future eurozone did not meet these requirements. But, as often happens with theoretical approaches, no area will probably ever meet all of such criteria: an «optimum currency area» can, in practice, hardly ever be anything other than an area that has already had a single currency for several decades.

Robert Mundell himself, incidentally, has never considered that his theories actually implied that a single European currency is impossible or undesirable. He has actively supported the single currency project, with which he has been regularly associated since the 1970s, although he has also often cricitised the positions defended by German politicians in the pursuit of it.

Read more: The Euro: Why Joseph Stiglitz Is Wrong