Join together?

The phrase "The bigger they are, the harder they fall" may ring true often, but it depends upon how "big" is defined. If "big" means tall, then certainly a taller structure with more mass than a shorter structure is likely to crash harder. But if "big" means broad, then a wider structure with more mass than a smaller structure of the same height is more likely to survive.

A good, but sad, example of this is to compare the World Trade Center with the Pentagon. The World Trade Center had around 800,000 m² of floor space while the Pentagon has about 616,000m² of floor space. That’s not entirely comparable, but the fact was that two airliners were able to completely demolish the WTC while one airliner was never able to demolish more than a small percentage of the Pentagon. The reason? The WTC was tall, while the Pentagon is wide.

So when it comes to examining the current economic crisis, what will happen? Is the US economy "tall" and thus prone to a systemic collapse, or is it "broad", and thus able to resist the current crisis more or less intact?

Yet the answers to those questions can quite often ignore other important facts – namely that the "small" structures will get hurt, no matter how comparatively tall or broad they are – and I am referring here to the world’s smaller entities. Like poor Iceland for example, whose economy has collapsed and suffered capital flight despite the fact that the country was merely an innocent bystander.
 

The genesis of the Euro was, in part, to the effects of Black Wednesday in 1992, when the European Exchange Rate Mechanism was unable to withstand market pressure. While the Euro had been proposed for a long time, the effects of Black Wednesday spurred mainland Europe on towards the adoption of a single currency (while the opposite effect occurred in the UK). Since its complete adoption in 2002 by many European nations (now called the "Eurozone") the Euro is one of the three most important currencies on the planet with the US Dollar and the Japanese Yen. Moreover, the Eurozone itself has a higher GDP than the US, which means that the Euro is associated with a larger economic area than either the US Dollar or the Yen.

The creation of the Euro and the Eurozone is an example of smaller nations banding together to create a single economic unit. This obviously has advantages and disadvantages, but one advantage it does have is a better ability to withstand economic shocks. If the Euro and the Eurozone did not exist, and if European nations still used Francs, Lira, Marks and Punts then the current crisis would’ve hit Europe harder. As it is, the crisis Spain is in now is being distributed throughout the entire Eurozone rather than just hitting the Spanish. Conversely, the crisis Iceland is in now would have been avoided had icelanders adopted the Euro. Accession to the Eurozone and the adoption of the Euro is now very much on the Icelandic agenda, despite the horse having already bolted.

This joining together of national interests for the common good is an example of making the economy broader rather than taller. Spain’s crisis is a crisis for the whole EU, but, because the crisis is smaller in comparison to the rest of the Eurozone, the crisis is far more manageable. Since Spanish households, individuals and businesses have got Euro bank accounts, their deposits and savings are safer than if they had remained as Lira. This has been to the detriment of other members of the Eurozone, of course, but the overall net result of a common currency is greater than if these countries retained their national currencies.

The current crisis will certainly cause many nations to reconsider their financial independence. Since international trade is so important to all economies of the world (with the exception of places like North Korea or Pitcairn Island), the importance of maintaining economic balance should eventually outstrip any desire to keep national currencies.

What is not debatable at the moment, nor once the crisis is over, is whether the supranational Eurozone is superior to America’s US Dollar. Even though the crisis started in the US, the subsequent economic performance of the Eurozone or the US will not settle any questions over which one is superior. The reason is that the US does have a "broad" economy that will eventually recover, even though it is a single national entity.

One thing that will be proposed once the crisis is over is the adoption of a single international currency. While this may scare some Americans who would begin to babble about conspiracies and The United Nations and UFOs, the idea certainly has merit – the broader an economy gets, the more likely it is that economic shocks can be contained or prevented. In reality, though, such an event is unlikely to happen during my own lifetime, let alone during the 21st century – national identity is still going to be important to many people, and that includes financial sovereignty. The crisis will probably help spur some Eastern European nations, Iceland, Switzerland, Sweden, Norway, Denmark and maybe even the UK, Turkey or even some North African nations to join the Euro but that would be the extent of any supranational economic reactions to the current crisis.

What will occur in light of the current crisis will be a series of international economic agreements – especially ones that set up common policy requirements for how central banks operate. If the US Federal Reserve, the European Central Bank and the Bank of Japan (US Dollar, Euro, Yen) all had common policies (ie common inflation targets and common responses to monetary conditions) then the international marketplace would be a much safer and more predictable place to invest money. If other nations joined this agreement, then conditions would become safer still – and that is what the world really, really wants at the moment doesn’t it?