Diverse economies can only be protected by a diverse range of monetary policies

Monetary policy and fiscal policy must be used in tandem if they are to be effective. Moreover, monetary policy and fiscal policy are tools that should only be wielded by politicians and bankers with an in-depth understanding of the economy that they are attempting to control. The core problem with the Eurozone is the belief that the business cycles of its various member states are so closely aligned that they can all be controlled by the same body. Unfortunately, this premise contradicts one of the most beneficial effects of the European single market – economic specialisation. Where large economies are gathered closely together- as in central Europe- competition in the same markets between those economies becomes intense and, eventually, ruinous. Rather than competing directly in some industries, many European states choose to specialise in manufacturing products or providing services that are unproduced or underdeveloped in other member states. Britain and the Nordic countries have large software sectors – a market that Italy and Spain do not cater to.[i] Britain also provides financial services on a large scale with almost 80% of Europe’s financial services.[ii] Germany has become an expert machine component manufacturer, while Italy dominates the garment trade and France provides infrastructure expertise. Different types of market and different economies grow and contract in different ways. Contraction in the housing or heavy industry markets may not happen at the same time as contraction in the software market. At the same time as the collapse of the US housing bubble in 2007 created substantial disruption in the financial services market, the market for mineral extraction machinery and services was booming (largely thanks to Chinese demand). Consequently, some states may experience an economic downturn at a time when others remain stable and productive. If the Eurozone were not part of a monetary union, individual states’ treasuries and central bankers would be free to alter monetary policy to ensure that states were able to survive the disruption of industries that were important to their national economies. Ireland, for example, underwent rapid asset price inflation in 2008. The value of new homes in Ireland rose 250% between 1996-2006.[iii] If central banking officials in Ireland had been able to raise interest rates on Irish currency, the increased cost of borrowing money would have discouraged further purchasing or development of property. This would have gone someway to preventing speculative acquisition of plots, houses and offices, reducing demand for property and relieving inflationary pressures. In practice, this did not happen. Ireland was- and remains- part of the Euro, so the interest rate applied to its currency, as with all Eurozone states, was decided by the European Central Bank. When increases in the price of Irish property assets were at their most excessive the ECB was making decisions about the Euro’s interest rates based (broadly) on data representing the economic health of the Eurozone as a whole. It proved unresponsive to suggestions that it should vary this rate in order to ensure that the Irish economy did not “overheat”. Other economies within the Eurozone were not experiencing uncontrollable increases in prices, and the restricting the supply of currency within these states would have slowed their growth.[iv] Thus, the Euro harms individual Eurozone economies, by restricting their ability to respond to changes in the markets in which they are most heavily involved. This, in turn, increases the likelihood that they will undergo recessions or encounter unmanageable commodity price or asset price inflation. Trust in the ECB is likely to dip in states that experience downturns of this type; public confidence in the wider European project may falter. [i] Daniel, ‘23% of Europe’s largest software companies are from Nordics’,  VC Perspectives, 2 March 2009, http://vcperspectives.com/wordpress/2009/03/23-of-europes-largest-softwa... [ii] Armitstead, Louise, ‘MEPs plot to impose financial transaction tax on UK’, The Telegraph, 4 October 2011, http://www.telegraph.co.uk/finance/personalfinance/consumertips/tax/8804... [iii] ‘Ireland’s residential property still in deep crisis’, Global Property Guide, 27 August 2011, http://www.globalpropertyguide.com/Europe/Ireland/Price-History [iv] Malzubris, Jānis, ‘Ireland’s housing market: bubble trouble’, ECFIN Country Focus, Vol.5, Issue 9, 26 September 2008, http://ec.europa.eu/economy_finance/publications/publication13187_en.pdf p.4