Love Thy Neighbour, Keep Thy Money

As long as the powerhouses of Europe prefer austerity over economic solidarity, we must remain pessimistic about the future of the continental union.

Sixteen years ago, the Italian economist and Harvard Professor Alberto Alesina forecasted that the Euro would not help to achieve a “political union in Europe”. To the contrary, Alesina wrote, "with all probability, contrasts between European countries would increase together with the tendency to coordinate monetary, fiscal and other policies. Forcing countries with different cultures and traditions to uniform their policies […] is a useless and potentially very dangerous operation”.

Alesina also outlined why the US dollar work but the Euro doesn’t. American salaries are more flexible and people tend to move more freely between states. In Europe, cultural nationalism is dominant in the workplace. Or can anyone imagine a Frenchman leading a top German company, or a German leading an Italian business? (In a way, the answer is yes: Many Italian companies are already owned by German or French holdings.)

Mobility and flexible salaries compensate for what Alesina calls “regional asymmetrical shocks”: if a state is in a crisis, its people move and salaries are reduced. Moreover, “for every dollar less in disposable income, around 30-40 cents are paid back through fiscal compensations”. This means that eventually booming California may transfer money to crisis-ridden Oregon.