As the eurozone is about to explode, it might be a good time to take a look at some of its forerunners. For unlike many of us perhaps think, our European Economic and Monetary Union (EMU) is not all that unique. There have been various monetary unions throughout European history, which in turn have all become defunct, and all for the same reasons.
One of these predecessors is the LMU, Latin American Monetary Union, set up in 1865 by Belgium, France, Switzerland and Italy. The aim was to strengthen the economies of continental Europe and for the French franc to become the world's second currency, after the British pound. In order to achieve this, the franc had a fixed value: 1 franc corresponded to a value of 0.29 grams of gold or 4.5 grams of silver. Coins from the other countries were interrelated and mutually coupled to the franc’s standard. Spain, Greece, San Marino, Romania, Bulgaria and Serbia also entered the Union, as did far away Venezuela. The currency coupling meant that the countries’ national coins could be used throughout the entire Union. It simplified international trade and stabilized exchange rates, so that the countries were able to borrow on the international capital market more easily.
In this respect, the LMU is very similar to the modern EMU. A big difference however is that despite the franc’s prominent role the LMU did not have a shared currency. Therefore the LMU countries were able to produce extra money if they needed to. France did this in order to finance the war against Germany in 1870. The Italians also printed extra money, albeit more systematically than the French, which led to a sharp rise in inflation in Italy. When the lira’s value had become so low that Italy wasn’t really able to stay in the Monetary Union any longer, the country temporarily pulled out. This is another contrast with the EMU.
Something else which sounds familiar is that Greece and Spain went bankrupt, when despite their LMU membership they were no longer able to easily borrow on the capital markets. And as in the past decade, the Greeks cheated: on this occasion not by making up their budget figures, but by fiddling with the drachma’s gold content. The Greeks exchanged coins containing a lower gold content on a large scale. In 1908 they were punished by being thrown out of the Monetary Union. In any case, the LMU had already had its hey day and was on the decline, although it still managed to formally remain in existence until 1927. At the respectable age of 62, the Latin Monetary Union is the longest surviving international monetary union in history. And I think it will hold onto this record for a bit longer.
Another forerunner of the EMU is the Scandinavian Monetary Union, which Sweden, Denmark and Norway set up in 1873. The three countries replaced their two and a half guilder coin (rijksdaalder) with a new coin: the crown, which they still use today. The crowns were given a gold standard: 1 gram of gold corresponded to the value of 2.48 crowns. The countries also recognized each others’ crowns as a legal tender and the national banks no longer charged one another for mutual transactions. When Norway ended the personal union with Sweden in 1905, this had no consequences for the monetary union. The end came about in 1914, when Sweden decided to abandon the tie to gold, so that a fixed exchange rate with the other two crowns ceased to exist.
What finished the Scandinavian and Latin American monetary union off was the lack of political collaboration. The participating countries each pursued their own financial, fiscal and economic policy, if need be at the expense of each other as well as the union. This is also the EMU’s major weakness. The United States is an example of how political unity is vital for the success of a monetary union: political integration has upheld the American Monetary Union for over one hundred years. The architects of the euro were well aware of this, but they believed that political union could be accomplished at a later stage. They were however deceived. The current erosion of democracy and the weak political leadership which is being established by opinion polls and populism stand in the way of further integration.
At the end of the day however, a monetary union with no political unity is merely a transfer union, whereby the rich regions remit funds to the poorer ones. This will always imply a certain amount of tension, unless the poorer regions have something to give back. In the eurozone this is not the case. The poor regions are also the ones with the fastest aging populations, they have little to offer in terms of consumers or workforce, and furthermore are also democratically immature and politically unstable. In these kinds of circumstances a monetary union cannot be upheld. This is becoming painstakingly clear now we are on the eve of the euro being divided into a strong North Western European “Neuro” and a depleted South European “Seuro”.
However, European history does have a monetary success story which offers the Euro hope for an alternative future other than division: the Austrian Maria Theresia Thaler, which was introduced in 1751. In no time at all the strong Thaler became an international trading coin, which was even used in the Middle East, Africa and America. The coin was so popular that it lent its name to the American dollar and also the Dutch “daalder”. From 1870 onwards - the date of Empress Maria Theresia’s death – the Thalers always bore this date. The coins were minted up until the late twentieth century in London, Paris, Utrecht and Bombay. They are still used in some Arabic bazaars today.
I believe the Thaler is an inspiring example for the Euro. Instead of cruelly killing off our European coin, we should maybe give weak euro countries the opportunity to use their own national coin alongside it. The Greeks would then once again be able to mint their drachmas and the Spanish their pesetas, whilst we continue to hold on to the conveniences and (supposed, for they have never seriously been examined) advantages of a euro founded on the economic power of the Western European countries.
