Europe has extensive experience with currency union break-ups

  • The Latin Monetary Union (LMU) joined Belgium, Italy, and Switzerland together with France in 1867. The arrangement managed to hold together until the generalized breakdown of global monetary relations during World War I.
  • The Scandinavian Monetary Union (SMU) formed in 1873 by Sweden and Denmark and two years later by Norway. This was disrupted by the suspension of convertibility and floating of individual currencies at the start of World War I. the agreement was finally abandoned in 1931.
  • The Austro-German Monetary Union was dissolved in less than a decade following Austria’s defeat in the 1866 Austro-Prussian War.
  • The only truly successful monetary union in Europe came in 1922 with the birth of the Belgium-Luxembourg Economic Union (BLEU), which remained in force for more than seven decades until 1999.
  • Europe in the twentieth century has also seen the disintegration of several monetary unions, usually as a by-product of political dissolutions.
  • A celebrated instance is after the Austro-Hungarian Empire was dismembered by the Treaty of Versailles. Almost immediately, in an abrupt and quite chaotic manner, new five currencies were introduced.
  • There also have been British and French currency unions with and between colonies.

Since World War II, economies have exited currency unions at an average rate of one per year.

Andrew Rose found

…that countries leaving currency unions tend to be larger, richer, and more democratic; they also tend to experience somewhat higher inflation.

Most strikingly, there is remarkably little macroeconomic volatility around the time of currency union dissolutions, [emphasis added] and only a poor linkage between monetary and political independence.

Indeed, aggregate macroeconomic features of the economy do a poor job in predicting currency union exits.

Rather than saying Euroland cannot fall, the discussion should be dissolutions of currency unions are common, especially when Greece is a member. What happened? How was it done?

HT: Monetary Unions.

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