[T]he dollar area will fragment over the next ten years.
Recent events have made it clear that the idea of monetary union is deeply flawed. Economic specialists have long pointed to the contradictions, but politicians pushed ahead for essentially non-economic reasons. We are now paying the price.
The coexistence of a single currency and a single central bank with a set of separate state budgets is a fundamental contradiction. The union lacks a mechanism for adequately co-ordinating those budgets. The result is the unseemly spectacle of some states (California, Nevada) chronically overspending while others (West Virginia, Wyoming) live within their means. Often the deficit states are the ones with high unemployment rates and serious competitiveness problems.
This unsustainable state of affairs has multiple causes, but it has been aggravated by the existence of a single currency. Without the risk of exchange-rate changes, the member states share a common level of interest rates, making it easier for the profligate to live beyond their means. So long as investors remain somnolent, the less disciplined member states are encouraged to throw "one big fat Greek party". When they finally awake to the fact that government finances are unsustainable, all hell breaks loose.
Creating a monetary union of the 50 American states was a mistake. The dollar area is sure to fragment in the next ten years.
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