Flawed Currency Areas and Viable Currency Areas: External Imbalances and Public Finance in the Time of the Euro

Abstract

The main problem discussed in this paper is whether a balance of payments con-straint exists within the Euro area. It is argued that the question of a member state’sforeign position is still relevant, at difference from what happens in successful cur-rency areas like the USA, where persistent imbalances in the payments from one dis-trict to another are acceptable and are made sustainable by financial transfersrevolving around the system of taxes and transfers and the public debt. A currencyarea is an area where the price of a deposit with the banking system is the samewherever the deposit is held (i.e. there is uniformity in the value of commercial bankmoney). Persistent imbalances in payments between regions within the area are to besettled in either the common currency or (which is basically the same thing) thepublic debt. But while this is acceptable in the USA, it is far from acceptable in theEuro area, where creditor countries (Germany being by far the most important)clamour for a settlement in ‘hard assets’, like, e.g. state-owned real estate, if notgold. This means that a balance of payments constraint still binds state members ofthe Euro area, and is a serious threat to its survival.JEL Classification: E58; F32; F42; H71; H72