One of the problems with economics is that it tends to narrowly parse its objects of inquiry. That is, it suffers from a deranged elegance: too few factors are considered and the ones that are get so rendered that they rarely resemble the original beast. It is curios in this respect that Paul Krugman should play the church mouse and Stephen Gordon the Scrooge. But hey I come from an Anabaptist tradition so what do I know. Between simply getting for free through a culture of potential heresies in the margins and a culture of perfecting the reformed holy writ something almost always creeps in.
Shit happens and in this, the Euro, Gordon is closer to the mark than Krugman.
As Gordon (Stephen not to be confused with the other venerable Gordons: different breed I gather) argues:
The euro project had much more to do with advancing the goal of promoting an ever-close political union than implementing a sensible monetary policy. As the current crisis has shown, a common currency is hard to sustain without a central government that is able to redistribute income from one region to the other. It seems to me as though the people who pushed the common currency hoped that by the time the euro was put under pressure, the central government with the necessary powers of redistribution would be in place.
I think Mr. Gordon is on to something but he does not go far enough. Both right and left in Europe feared the Euro was part of a broader project of cajoling EU countries towards a more neo-liberal policy paradigm (perhaps one which Gordon would support). The point was to force an independence between the central banks and potential or actual “political” interference (again something Gordon would probably support). Note that in Sweden the fight over the adoption of the Euro played itself out in somewhat this way. Interestingly, both the social democrats and the “bourgeois” parties wanted the Euro. The popular left did not because despite the functional independence of the SCB the popular left wanted the possibility of a bank that could be capable (if forced) of taking everything from exchange to inflation rates into consideration.
The other side of the Euro debate was the desire to make sure that the EU was not plagued by beggar-thy-neighbour monetary policy–reasonably understanding that a race to the bottom could be negative sum. And I think this is why the putative left establishment in Europe supported and continue to support the Euro.
Krugman is thus naive; the Euro was never a mere technocratic exercise designed to reduce transaction costs. Yet Gordon is equally naive for different reasons. The Euro was only in part about transaction costs and only in part about redistribution (although as Gordon notes redistribution is the spoonful of sugar that was supposed to make the medicine go down) it was also in large measure a plan to take the perceived candy jar away from the children–politically accountable national central banks.
In this regard Canadian central banking works because politically speaking it is free to rest just above whatever the FED decides. Thus this why the BOC never goes offside: it takes its cues and dues from the FED not parliament. The EC could not guarantee this unless all were brought to heel: thus the Euro.
If we had a less independent central bank in Canada I suspect Gordon would be singing a different tune.