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Now let’s continue the thought experiment from my previous post to another kind of currency, the regional currency union (‘cough’, Euro! ‘cough, cough’).

In this instance, let’s think of Country AX and BX, who both use the common currency X. Neither of them issues their own currency. Currency is issued by a master headquarters comprised of bureaucrats from both AX and BX.

Now AX is a more productive economy than BX. As a result, it experiences a string of surpluses, while BX does not. In fact, just to catch up to AX, BX incurs debt (in X, of course) to finance its growth programs.

AX continues its string of surpluses. BX does not have the same results. The main reason is that AX’s string of surpluses is making X, which is a floating currency, more valuable. This makes BX’s exports more expensive for other countries, so it cannot hope to replicate AX’s results.

So to finance its deficits, and to finance its debt services, BX incurs more and more debt in X.

Now everything would be fine if AX would just give all its excess earning of X to BX. But that was not the point of incurring surplus in the first place. AX has an ageing population, and it has social programs to finance. So BX goes on its merry way of borrowing.

Master headquarters won’t help too, as it won’t ‘print’ more of X just to help BX, because doing so would be detrimental to AX. (There are also other countries, CX, DX, EX, who will also be adversely affected) So BX is in a bind.

How long before BX goes down and drags the entire X currency with it? But then if X goes down, that solves BX’s unaffordability problem.

P.S. I just thought of this. When AX incurs its surpluses, doesn’t master headquarters print more X, so other countries will have the currency to buy AX’s goods? I guess, the matter of ‘printing’ money enters the picture again. Implication is that for as long as BX is part of currency union X, and AX continues its surpluses, then BX will never run out X to borrow. Have I missed something else?

Now let’s continue the thought experiment from my previous post to another kind of currency, the regional currency union (‘cough’, Euro! ‘cough, cough’).

In this instance, let’s think of Country AX and BX, who both use the common currency X. Neither of them issues their own currency. Currency is issued by a master headquarters comprised of bureaucrats from both AX and BX.

Now AX is a more productive economy than BX. As a result, it experiences a string of surpluses, while BX does not. In fact, just to catch up to AX, BX incurs debt (in X, of course) to finance its growth programs.

AX continues its string of surpluses. BX does not have the same results. The main reason is that AX’s string of surpluses is making X, which is a floating currency, more valuable. This makes BX’s exports more expensive for other countries, so it cannot hope to replicate AX’s results.

So to finance its deficits, and to finance its debt services, BX incurs more and more debt in X.

Now everything would be fine if AX would just give all its excess earning of X to BX. But that was not the point of incurring surplus in the first place. AX has an ageing population, and it has social programs to finance. So BX goes on its merry way of borrowing.

Master headquarters won’t help too, as it won’t ‘print’ more of X just to help BX, because doing so would be detrimental to AX. (There are also other countries, CX, DX, EX, who will also be adversely affected) So BX is in a bind.

How long before BX goes down and drags the entire X currency with it? But then if X goes down, that solves BX’s unaffordability problem.

P.S. I just thought of this. When AX incurs its surpluses, doesn’t master headquarters print more X, so other countries will have the currency to buy AX’s goods? I guess, the matter of ‘printing’ money enters the picture again. Implication is that for as long as BX is part of currency union X, and AX continues its surpluses, then BX will never run out X to borrow. Have I missed something else?