Currency Unions in Historical Perspective: What Can We Learn?

No currency union has ever succeeded without being embedded within a broader political union with a robustly centralized fiscal system.  Yet Europe's Economic and Monetary Union (EMU) was explicitly designed to be ‘disembedded,’ without the trappings of a typical national economic system.  Indeed, its European Central Bank (ECB), the centerpiece of EMU, was lauded for its degree of independence, based upon the assumption that standing alone, separate from political decision making, the ECB could only make the currency stronger. EMU also was designed without a matching European level fiscal system of public debt, taxing, spending and financial regulation, relying on a set of rules concerning macroeconomic prudence instead. Given this backdrop, this chapter will address three linked questions. What can the design and operation of past currency unions tell us about the challenges the Euro faces today?  Why did EMU develop so dramatically differently from past monetary unions? And what do these differences tell us about the various potential paths of reform or collapse that face the Euro?