For a single-currency area to be sustainable, one of two conditions needs to be met. One, sufficient economic convergence throughout the area in question. Two, a transfer mechanism to offset whatever economic divergences exist in the area. The eurozone currently meets neither of these conditions. Thus the eurozone’s days look numbered. Couldn’t be simpler. End of story.
What is actually far more fascinating is the question that the current predicament in the eurozone poses about Japan as a single-currency area.
For the present, Japan is indeed a single-currency area. Its national single-currency is the yen. The yen is used and accepted everywhere up and down the Japanese isles. But for how much longer can these conditions last? Japan is a single-currency area but economic convergence is by no means complete throughout the economy. Not by a long shot.
Japan is actually becoming an increasingly Tokyo-centric economy. Tokyo is super rich. Osaka, the second-largest city in the country, pales visibly against Tokyo’s dazzling performance. A somewhat Tea Party-like group lead by a maverick and rather alarming politician is trying to play on the frustrated sentiments of the Osaka public to make its way onto center stage in national politics. It could well be argued that even at the very height of its equal society days, it is doubtful whether Japan met the conditions to justify a single-currency area in terms of economic convergence.
In the absence of economic convergence, it is of course the presence of a central income transfer mechanism that holds Japan together as a single-currency area. We call that central transfer mechanism fiscal policy. Income transfers to even out regional disparity have always been a major feature of Japanese fiscal policy. Massive amounts have been shovelled into large public works projects so that regions up and down the country can each have their own concert halls, art galleries and community centers.
Now, however, that central transfer mechanism is in deep trouble, to put it charitably. In reality, the mechanism is more or less defunct. Fiscal policy is supposed to be there to help out the private-sector economy in troubled times. It is supposed to be the ultimate rescue crew. Yet it is now the rescuer that needs the rescuing.
In this respect, Japan is now in precisely the same position as the eurozone. It is increasingly unable to meet either of the two conditions that justify Japan as an optimum currency area. So its days are numbered as a unified yen zone. Theory suggests this, and practice also seems to indicate we are heading in that direction. For there are now many regions in the country that are experimenting with their own currencies. So far, these regional currencies have really been no more than area-restricted shopping coupons that promote localized consumption. Yet as national fiscal policy becomes a less and less reliable source of help and assistance, who is to say that one day Japan will not end up as a multiple-currency area?
Really, when one comes to think of it, the same will apply to most countries that are single-currency zones today. How long till the United States breaks up once more into regional currency areas? What of Italy? What of the U.K.? What of even much smaller Belgium, where the north-south divide is a persistent challenge to national integrity?
Nation-states as fiscal unions are becoming unsustainable pretty much everywhere on the globe. We may be heading toward a world in which the number of currencies is larger than the number of nation-state economies. That may not be such a bad idea.
Noriko Hama is an economist and professor of the Doshisha University Graduate School of Business.
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