Can you imagine if every time someone from Brooklyn went to Manhattan, she had to use a different currency?
In an excellent NY Times Magazine article, economist Paul Krugman explains the euro zone. He tells how it began, describes the problems that have always existed, and presents 4 scenarios for the future. He also tells us why Iceland is better suited to having its own currency than Brooklyn, although Brooklyn has 8 times as many people.
His point? Currency union can be helpful.
His second point? Currency union can create big problems when nations need to deal with their own economic problems.
Commemorating, the first steps taken toward a European Union on May 9, 1950, Europe Day is celebrated today. Euro zone members can smile on Europe Day because they have been able to enjoy the benefits of a larger market. Dr. Krugman wonders though, whether it can last.
The Economic Lesson
Monetary policy and fiscal policy are the two basic ways that nations guide an economy. Monetary policy targets the supply of money and credit. Fiscal policy involves spending, taxing, and borrowing.
The euro zone facilitated a monetary authority but no fiscal unity. And therein lies the problem.
An Economic Question: During the recession in the U.S., using which tools did monetary policy and fiscal policy target the same goals?
Here, you can listen to a wonderful Teaching Company lecture from Dr. Timothy Taylor (Lecture 6, “America and the New Global Economy”) on the euro zone.