Why does Europe have so many problems with its currency? The US also has a currency that covers lots of different states, some as strong as California or NY, others on the weak side, with little strong industries (like finance, technology, and the like).

Why has the EU monetary policy gone wrong?

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    Because USA is a single nation, while EU is made of many different nations, mostly independent? Because the Euro was created only a few years ago, while the Dollar is centuries old? This question is a bit silly, sorry :( – o0'. Mar 11 '14 at 8:58
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    @Lohoris; Pay more attention. That's not an answer, you are just re-stating the question and saying that's the reason, not explaining why it's relevant, – Quora Feans Mar 11 '14 at 10:27
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    What problems does the EU have with it's currency? – Sam I am says Reinstate Monica Mar 13 '14 at 14:46
  • -1: Sorry to say, but this question only invites for opinionated answers. What actual "many problems" do you see there, assuming they don't apply for U.S.? Please consider clarifying the question. Note, the answers actually attempt to answer different questions, depending on how people perceive what you're supposed to ask. – bytebuster for Long Usernames Oct 6 '14 at 22:10
  • @bytebuster: you are right that the question could be more nuanced. however the answers that came in are not part of a discussion, but meaningful explanations. – Quora Feans Oct 7 '14 at 17:53

First some history. The US did not always have a monetary policy. It has not always had a strong currency. It defaulted in the Revolutionary War and in the War of 1812 and on the Bretton Woods gold standard agreement.

Sayeth Wiki:

With the enactment of the National Banking Act of 1863, during the American Civil War and its later versions that taxed states' bonds and currency out of existence, the dollar became the sole currency of the United States and remains so today. (I've highlighted Civil War here because the US system is coming from a war, not from a consensual union. Politically speaking this has consequences for the EU to consider if it wants to be more like the American model)

The US did not have a proper "monetary policy" until the Federal Reserve was established in 1913, the last of all industrialized nations at that time.

Debt is the main problem facing the EU.

After the Civil War, the Fourteen Amendment, said that US debt (Green Backs) can not be repudiated. It must be paid in other words. It also said that debts incurred by the Southern states from the war or loss of slaves cannot be paid. Ten states defaulted. Nine states defaulted during a major recession in the 1840s. The Great Depression caused a new round of state bankruptcies. The effect of this is that the US states have nearly all laws that require them to have balanced budgets and it is well followed. This has occurred as a bitter lesson of history, so these things are not always transferable.

One intent of the EU's Maastricht Treaty was to keep down debt levels of member states, but it was not carefully followed. US states are not likely to keep hardly any debt. The US states aren't nations either, so they do not have external debt usually. The US constitution does not allow US states to sign treaties with foreign countries without federal approval, for instance. High EU member debt levels can bring down the Euro.

US redistributes money to keep up its monetary union.

EU members may have started to notice that some nations have been asked to pay for other countries over spending.

In the 20th century, US states have no longer operated their own armies or welfare systems or they are heavily subsidized. Federal tax monies are constantly redistributed from wealthy to poorer states through various mechanisms. Economists theorized that the redistribution of workers crossing borders in the EU would be sufficient to accomplish this goal. Fewer workers moved than was believed would. Europe speaks many languages and has many cultures and has many blocks to entry to jobs in other countries even if now one may freely move from one nation to another. Living standards did not improve in less wealthy countries through this mechanism and it failed.

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    Debt is hardly the main problem facing the EU. Obsessing over debt is actually part of the problem. In actual fact, except for Greece, debt increased as a result of the Eurozone's structure and the handling of the crisis. “Over-spending” is not a cause of anything. – Relaxed Oct 3 '14 at 3:06

I can't claim to fully understand all the issues but I find the things Paul Krugman writes about it interesting and convincing. He frequently touches upon the subject on his blog, offering new nuances and links to research and commentary by other economists but I think this 2012 post sums it up.

The disadvantages of a single currency come from loss of flexibility. It’s not just that a currency area is limited to a one-size-fits-all monetary policy; even more important is the loss of a mechanism for adjustment. For it seemed to the creators of OCA, and continues to seem now, that changes in relative prices and wages are much more easily made via currency depreciation than by renegotiating individual contracts. Iceland achieved a 25 percent fall in wages relative to the European core in one fell swoop, via a fall in the krona. Spain probably needs a comparable adjustment, but that adjustment, if it can happen at all, will require years of grinding wage deflation in the face of high unemployment.

But why should such adjustments ever be necessary? The answer is “asymmetric shocks”. A boom or slump everywhere in a currency area poses no special problems. But suppose, to take a not at all hypothetical example, that a vast housing boom leads to full employment and rising wages in part, but only part, of a currency area, then goes bust. The legacy of those boomtime wage increases will be an uncompetitive tradable sector, and hence the need to get at least relative wages down again.

Basically, the problem is that the economy (and the fiscal policy) in the various EU member states is not in sync. Without floating currencies, adjustments are extraordinarily difficult and some countries are condemned to remain uncompetitive, with depressed growth and extremely high unemployment for a long time after a shock. Obsessing over the debt, excessively low inflation and the EU elites' refusal to accept that the current problems are demand-related and cannot be solved with austerity only made this worse but those problems also exist outside of the Eurozone (e.g. in the UK and Sweden).

But the truth is that there are strong regional differences in the US too. In a way, the US also has the same problems on a lower scale and some regions have been underperforming the national average in terms of growth and could perhaps benefit from a different policy. But the adverse effects are mitigated by at least two things:

  • Transfers through federal spending, especially welfare, which is still strictly a national matter in the EU.
  • Stronger mobility. Even if many EU policies are designed to foster workers' mobility and it seems many young Irish, Spanish or Portuguese people emigrated as a response to the crisis, I think the mobility is still lower in Europe than it is in the US.
  • I think the points about exchange rates and movement of labor are much stronger than the dubious record of fiscal and monetary stimulus, still +1. – lazarusL Oct 3 '14 at 11:42
  • @lazarusL There is nothing dubious about fiscal and monetary stimulus IMO but it's only a response to a specific problem and not really related to the euro question. The UK or Sweden have managed to hurt themselves almost as bad, without any of the problem of the common currency. Lack of adjustment through exchange rates and limited mobility on the other will remain an issue going forward. I edited the answer to clarify this. – Relaxed Oct 3 '14 at 14:55

Nothing wrong with EU monetary policy, and nothing extraordinary with US federal reserve.

It is informational pressure coming from european communists wing, which states that euro politics should be more inflationary then it is now. But thanks to common sense of general authorities in EU, they do not inflate euro. In fact, I think it would be good not to inflate euro at all, it works very good, look at China's yuan.

Monetary problems in EU zone are not the biggest issue, but the spendings are for now.

  • The ECB's main objective is to keep the inflation at 2% - no country can force it to do something diametrical to that. Then the US is has a higher debt/gdp ratio than most european countries so it's safe to say that this can't be the sole cause. And if you take a look at Greece you'll see how much cutting the spending helped that country. – user45891 Oct 5 '14 at 15:35
  • (-1) Even if you want to make the case for austerity, you could do that without nonsense like “common sense” and “communists wing”. Your answer is also self-contradictory. While the commission and other decision makers do appear to believe that spending cuts are in order, the ECB under Draghi does not share your view (and has been criticized for that). The ECB aims for more inflation but the problem is that it can't do that alone because its rates are already so low. You can't claim that there is nothing wrong with EU monetary policy and still maintain that there shouldn't be more inflation. – Relaxed Oct 5 '14 at 22:36
  • Importantly, this has very little to do with the question, which is not about monetary policy per se but about the currency union in general. Looking at growth and unemployment, there is no denying the Euro has not worked well for its members… – Relaxed Oct 5 '14 at 22:37

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