A Tale of Two Currency Areas

PALO ALTO – The United States and Europe are two giant free-trade areas, each wealthy but with serious short-run problems and immense long-run challenges. They are also two single-currency areas: the dollar and, for much of Europe, the euro. The challenges facing both are monumental.

But only Europe’s currency union faces uncertainty about its future; America faces no existential crisis for its currency. The two economic powers’ similarities and differences, particularly with respect to internal labor mobility, productivity, and fiscal policies, suggest why – and provide clues about whether the eurozone can weather the crises on its periphery and evolve into a stable single-currency area.

Labor mobility from poorer to richer areas provides a shock absorber against differential economic hardship. The other natural shock absorber is a depreciating currency, which increases competitiveness in the area hit hardest. That cannot happen with a common currency, and economic adjustment is doubly difficult when labor is not mobile enough to help mitigate regional contractions in income and unemployment.

The reasons for lower labor mobility in the eurozone than in America are legion. True, America’s original thirteen colonies were a loose federation, and many Americans considered themselves citizens of their state first and of the US second as late as a century after the Revolution. But one’s state was not a fully formed nation, with its own shared and deeply ingrained history, culture, ethnic identity, and religion.