While driving Interstate 40 in the South recently, it became readily apparent why Federal Reserve Chairman Alan Greenspan has an easier job than European Central Bank President Jean-Claude Trichet: U-Hauls.
These vehicles tow belongings and cars with license plates from all states. Moving across country in response to personal dreams or macroeconomic trauma is part of the United States ethos. Similar moves are not part of European culture. That makes executing monetary policy much more difficult for the European Central Bank, which sets the policy for the 12 nations that use the euro.
These nations confront problems the United States mastered two centuries ago: achieving a uniform medium of exchange for a political entity encompassing fractious, squabbling states.
Most Americans don’t even think about that anymore, but the dollar became part of the glue that held the republic together. In Europe, the euro may be the acid test of whether the goal of a broader and deeper union is achievable. Robert Mundell won the 1999 Nobel Prize in economics for work on “optimal currency areas.” It had long been obvious that having different currencies for small political units was inefficient. Imagine the complications if each state here issued its own money.
But it also is possible to have too large an area served by a single currency because implementing monetary policy can be cumbersome. What if one nation using the currency is in deep recession and another has a booming economy and faces inflation? Should the central bank increase or decrease the money supply?
Mundell argued that a single currency could serve many nations as long as there was a high level of resource mobility among them. Raw materials, goods — and workers — all had to flow easily across political boundaries for a single currency to be practicable.
That is true in the United States. People have been pushed or pulled to California for 155 years. Crossing a state boundary to take a different job causes little more consideration than crossing a county line.
That is not true in Europe. Yes, Italian and Portuguese guest workers long labored in Germany. Young Greeks or Italians may wait tables in Ireland. Highly skilled engineers or executives think little of crossing borders within the European Union. And yes, one of the fears associated with the most recent EU enlargement into Central Europe is that low-wage Poles and Slovaks will move west in search of jobs.
Even so, the idea of a laid-off factory worker in Italy packing the family into a rented truck and setting off for Scotland remains a surreal fantasy. The linguistic and cultural divides between the 25 EU member nations make differences between Vermonters and Mississippians look tiny.
Such resistance to movement of workers from bust-stricken Germany to booming Ireland renders the task of the European Central Bank exceedingly difficult. This will slow European growth for generations.
© 2004 Edward Lotterman
Chanarambie Consulting, Inc.