MacroScope

Lessons for Europe from the U.S. single currency

May 20, 2010

The euro zone is not the only large currency union in the world.  There is also the United States. While it may be pushing things to see California as Germany and Mississippi as Greece, there is still a disparity in the potential of the economies of the U.S. States.

Harvard economics professor Martin Feldstein, the former chairman of  Ronald Reagan’s Council of Economic Advisors, reckons the dollar zone could offer some help to the euro zone. U.S. state deficits are minimal compared with Europe’s, he says in an op ed piece for The Washington Post. Even cash-strapped California’s is only about 1 percent of state GDP.

The secret, according to Felstein , is that all U.S. states have constitutions prohibiting borrowing for operating purposes. Bonds for infrastructure projects, yes. For salaries, services or transport payments, no.

Interestingly for today’s euro zone, some of these prohibitions date back to the 19th century when they wee introduced to stop states from borrowing too much following some defaults.

Feldstein admits that U.S. states and euro zone nations are not interchangeable (Greece’s defence needs, for one thing, are somewhat larger than California’s given the Federal government’s role).

But he judges that adopting the states’ way would build confidence among investors, control euro zone countries and lower interest rates.

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