America has been using a single currency since 1793, when the United States Mint in Philadelphia first began issuing US dollar coins. However, it is not the longevity of a currency that determines whether it succeeds, but institutional mechanisms. Such mechanisms are weak or lacking in Europe. To understand why, we need to examine how such mechanisms could help countries in a common zone to ride out economic cycle “booms and busts.”
When a country gives up its own currency (say, the drachma) in favor of a supranational one (such as the euro), it loses two important levers to help soften the blow of a recession: (1) It cannot unilaterally adjust its interest rates downward to stimulate its own economy in a downturn; interest rates could be held uncomfortably high by the supranational monetary authority if the economies in the other member states remain healthy. (2) And it is unable to devalue its currency in order to stimulate the nation’s exports.
For a single currency to function well, three conditions, or institutional pillars, must be in place: (1) fiscal discipline by member states, (2) labor and capital mobility, and (3) inter-regional balancing through transfer payments managed by a central government.
Fiscal Discipline by Member States
While American states are free to set their own budgets and raise money through taxes and borrowing, their excesses are curtailed by state constitutions that recommend or mandate balanced budgets; by an informed media that flags profligate spending; and by the discipline that the bond market imposes. Almost all US states manage to restrict their deficits to a few percentage points.
When the eurozone was introduced in the early 2000s, participating countries that gave up their own currencies made pious promises that they would restrict their budget deficits to no more than 3 percent. But no enforcement mechanism was put in place, and in the go-go years between 2000 and 2007 countries such as Greece ran up sovereign debts well in excess of that limit. By early 2015, Greek debt was estimated to be 177 percent of GDP—in short, unpayable—according to a recently leaked IMF report. In fact, previous Greek governments must have known they were taking huge risks because they hired investment banks such as Goldman Sachs to devise complex swap instruments that hid the true size of their borrowings from other EU states and the public. In 2010, Angela Merkel called this “scandalous.” But she could do nothing about the situation without an EU enforcement mechanism in place.
Labor and Capital Mobility
Recessions and economic downturns impact states differently. If a worker in an Ohio “rust-belt” factory is laid off, he may consider selling his home and loading the family and Golden Retriever into the minivan and driving to Houston or Silicon Valley, where jobs are available. On average, 42 percent of Americans do not reside in the state of their birth. This willing mobility reduces the impact of recessions and unemployment, decreasing the pain in the most affected states. According to the US Census Bureau, after age 18 Americans will move 9.1 times during the rest of their lives.By contrast, 47 percent of Italians, for example, live within 5 kilometers of their mamas. And although jobs are still going begging in Germany, the almost 30 percent of Greeks who are unemployed in 2015 do not wish to relocate because of cultural unfamiliarity and reluctance.
Europe is still a collection of separate cultures, employment regulations, and languages, and therefore labor immobility does not provide the smoothing-out effect seen across the United States. Capital, too, is less mobile across the EU, compared with the US, because varying company regulations and foreign-market unfamiliarity reduce the likelihood of a firm relocating or expanding outside its nation.
Inter-regional Balancing Through Transfer Payments Managed by a Central Government
In the US, most taxes are collected by a centralized federal government, which then allocates money to the states according to their needs. In Europe, each state collects its own taxes and is then reluctant to share any significant amount with the other “foreign” nations in the eurozone. On average in the US, a decline of one dollar in a state budget is offset by a transfer of 28 cents from the federal government.More can be made up by additional taxes raised by the state, providing a cushion to smooth out the bumps over a recessionary period.
True, the EU (Brussels) does reallocate some funds to member states, but these are very small compared with US transfers from the federal government to US states. Moreover, most of the funds Brussels redistributes are project-specific rather than designed to alleviate recessionary suffering or boost flagging economies. Bailouts such as those given to Portugal or Greece have to be painfully negotiated each time and agreed to by all EU member states. And the member states have veto powers. So Brussels really is not a central government, by any means.
Conclusion: Monetary Union Without the Three Institutional Pillars
The euro is a noble experiment designed to foster a sense of pan-European identity (and, incidentally, to reduce currency risk and transaction costs for firms). Its architects had hoped that the façade of unity would then be followed by the construction of three institutional pillars to solidify the structure. Fifteen years hence, European institutions have barely evolved enough to build such pillars or, in other words, to fulfill the three requirements of a monetary union. An appetite for a central fiscal authority is lacking, as is a mechanism to restrain individual states from excess borrowing to boost their budgets. For cultural reasons, cross-border migration of labor remains sluggish, and transfer payments from the rich nations of the EU to support their poorer neighbors is already running into such resistance that countries such as the UK threaten to withdraw from the EU altogether.
Can the noble experiment survive?
Certainly, other nations that received bailouts, such as Portugal, have not only turned the corner, but have begun to pay back their debts. It is possible that the shock of recent events can stem the profligacy of loose fiscal policies, especially if conditions are imposed on them. But the euro will remain a fragile construct, vulnerable to future shocks, whose survival will depend on the continued generosity of the richer members of the EU.
The following comments are based on a telephone interview with Bob Hennelly ofCBS News MoneyWatchon July 14, 2015.
The potential for US business to engage with Iran can be summarized in one sentence: Iran exports crude oil but imports gasoline.
This bizarre statement, based on the fact that the Iranians lack sufficient capacity to refine their own oil for domestic use, underscores how, hemmed in by sanctions and the limited worldview of their theocracy, Iranian technology and installed equipment is years, even decades, behind that of the West—not just in the energy sector, but across the board in most industries.
Their economy is already the biggest in the Middle East (except for Turkey)—with a population of 80 million having an average middle-class income of around $13,000 per capita,Iran is a large market, hungry for the latest technology and upgrading of its industries. The investment potential is enormous and will remain so for decades.
But will American firms immediately benefit? Probably not as much as Chinese, Russian, and European companies that will be the first at the gates of Tehran. Why? Faced with a hostile Congress and historical ties to Israel, President Obama has to strike an un-trusting and gradualist stance toward Iran. US regulations can be eased only over time, while Russia and China (two of the five negotiating nations) have already begun to make billion-dollar deals. German and French company representatives are already in Tehran. Moreover, the official opprobrium of the mullahs in charge of Iran is still directed principally against the US as “The Great Satan.”
That epithet should not fool or scare American corporations into staying away from the Iranian market. Recall that 57–62 percent(or 45–50 million) of the Iranian population was born after the revolution that brought the mullahs to power. To the under-30 crowd, or approximately 60 percent of the country, the rhetoric of the revolution and anti-American sentiment has the same background presence as the weather or air pollution in Tehran—persistent background static with no great long-term relevance. Under the chādor (the outer garment forced on Iranian women), designer jeans, lacy (and even risqué) underwear, and big-name fashion brands are the rage. (One of the subordinate considerations on the part of the US delegation led by John Kerry may have been the notion that easing sanctions can lead to a greater zeal on the part of Iranian youth to engage with the west and absorb Western ideas.)
From a commercial angle, it is a win-win situation for both the Iranians and the US. Iranian youth is open and eager for western ideas and brands. The Iranian economy badly needs upgrading to bring it up to Western standards. The mega-billions that such industrial revamping would cost can be easily be financed once Iranian oil exports can resume at their normal (pre-sanction) levels.
US companies have a great opportunity, but are likely to be at the back of the queue for a while—unless they can be legally represented by their foreign affiliates and subsidiaries to minimize the “American” association.
 With widely fluctuating exchange rates (plunging in recent years because of sanctions), it is difficult to get a solid US dollar equivalent. However, the $13,000 figure, based on PPP (Purchasing Power Parity) exchange rates, provides a reasonable estimate.
 Demographic data from Iran are uncertain, but estimates of the under-35 population range from 57–62 percent.
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