Why the Euro and dollar are so different

I was trying to explain the deal with the Euro to David yesterday and I realized that Matt Yglesias’ take on the matter is the most useful I have come across.  And certainly the most effective take for explaining the matter to a twelve-year old (and, of course, I think is generally on-target for all ages):

But if you look at a big place like the United States or China what you see are huge place-to-place divergences in economic vitality paired with large open-ended transfer programs. Even in smaller economies, the old West Germany has been subsidizing the old East Germany for a long time and will continue to do so for a long time. In Italy, the north helps carry the south. In the U.K., the south helps carry the north. Sometimes these things are formalized as place-to-place transfers (Canada, I believe, has large provincial equalization payments) and sometimes it’s person-to-person transfers that happen to have the net impact of letting Massachusetts subsidize Mississippi. The European Union does a little of this, but the scale is tiny compared to the continent as a whole. As we saw yesterday, most individual European countries have a lot of within-country transfer payments from rich people to poor people but Europe as a whole is marked by a high level of inequality and near-total absence of transfers. If in the United States every bailout of the poor parts of the country by the rich parts was marked by protracted negotiations and stern demands that West Virginia “reform” its underperforming economy we’d be in perpetual crisis. And of course you might ask yourself why the federal government does so much for low-income residents of the United States and so little for the poorer low-income residents of low-income Mexico. And of course the reason is nationalism. Nationalism inspires us to help our fellow American when we can and leaves us relatively cold about the plight of people living in Peru.

In short for the Euro to really succeed you need a real European nationalism.   And while Europe has come a long way, this just isn’t going to happen any time for a long time, if ever.  As different as people in Massachusetts and Mississippi are there is still a common language, and considerable shared common history and culture, and perhaps, most importantly, when thinking in geopolitical terms, the person from Massachusetts may think the Mississippian is a mouth-breathing redneck, but he’s still the “us” that is “Americans.”  That matters a lot.  Until Europeans start seeing each other that way (never?) the Euro would seem to have an uncertain future.

About Steve Greene
Professor of Political Science at NC State http://faculty.chass.ncsu.edu/shgreene

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