By Jack Crooks

Do we have a dollar breakout or fake-out in the making? It depends on the euro here.

The European currencies are lower against the dollar this morning on news that Germany didn’t want to throw its hard-earned Treasury at central and eastern European problems.  Why should they? Oh yeah, I keep forgetting, it is a “Union” of European countries.

I’ve been wondering how this Union would fair during a real test of the system since the introduction of the euro. Frankly, I didn’t think it would fair very well. And I have not been disappointed.

Not to wish ill on Europe — I really don’t. And I hope the budding eastern and central European democracies can weather this, given all they have weathered after being abandoned by the “great leaders” of West to dwell in an Orwellian-hell-hole called the USSR.     

But I continue to believe a viable monetary system must have political cohesion, besides synchronized business cycles. I must say that neither seemed to be present to any lasting degree within the European Monetary System (ERM). And any modicum of political cohesion may have just left the station.

Though we could see the ERM muddle through, maybe due in part to the massive problems of its competitors, it is a dangerous time indeed for the ERM.

I’m not the only one with doubts in the EU’s longevity. There has been concern in the market about the euro for many years. Below is an excerpt from an interview with Milton Friedman by Radio Australia back in July 1998, before the official introduction of said euro [our emphasis]:

RA: Thank you very much. Before we sign off, could I just take the opportunity to ask you what you think the prospects are for the attempts in Europe to create a common currency area? Are you optimistic about their success?

Professor Friedman: I think it's a big gamble and I'm not optimistic. Unfortunately, the Common Market does not have the features that are required for a common currency area.

A common currency area is a very good thing under some circumstances, but not necessarily under others. The United States is a common currency area. Australia is also a common currency area. The characteristics that make Australia and the United States favourable for a common currency are that the populations all speak the same language or some approximation to it; there's free movement of people from one part of the country to the other part, so there's considerable mobility; and there's a good deal of flexibility in prices and to some extent in wages. Finally, there's a central government which is large relative to the local state governments so that if some special circumstances affect one part of the country adversely, there will be flows of funds from the centre which will tend to offset that.

If you look at the situation in the Common Market, it has none of those features. You have countries with people all of whom speak different languages. There's very little mobility of people from one part of the Common Market to another. The local governments are very large compared to the central government in Brussels. Prices and wages are subject to all sorts of restrictions and control.
To sum it up: Danger Will Robinson! Danger!!

Best Regards,
Jack