The reason a currency union needs a political union is simple. The centre has to have some way of stopping parts of the union from borrowing too much in the common currency at the common interest rate. If some borrow too much they are free riders on the backs of the more prudent areas.
If they go on borrowing too much they undermine the credit rating of the whole area, and force up the cost of borrowing for the prudent parts. To achieve discipline, the centre also needs to send subsidies and payments to the poorer parts, to compensate them for their inability to devalue to price themselves back into a competitive position.
Today the single currency system is suffering from the double stresses of too much borrowing by countries such as Greece and Portugal, who have spent too much and raised too little in tax, and from the need of countries like Ireland to bail out their overstretched banking systems....
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Filed under: * Economics, Politics Economy Credit Markets Currency Markets Euro European Central Bank The Banking System/Sector The Credit Freeze Crisis of Fall 2008/The Recession of 2007-- Politics in General * International News & Commentary England / UK --Ireland Europe --European Sovereign Debt Crisis of 2010 France Germany Greece Portugal Spain
Posted July 3, 2011 at 5:26 pm
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