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2010-12-20

Sir Martin Jacomb: The flaw /in EMU/ was this

Martin Jacomb, FT December 19 2010
Sir Martin Jacomb is a former chairman of Prudential

The flaw was this: productive activity always tends to migrate to centres of economic success and prosperity.

This tendency is inevitable and visible in every single currency area.

Within a sovereign country that has its own currency, a large proportion of taxes raised by the government goes to benefit the less economically successful areas. This does not happen through regional aid, although this may help a little. It is achieved through wages paid to public sector employees, capital expenditure by central and local government and welfare-system transfer payments and so forth. Taxpayers tolerate this in the interests of social harmony.

In a single currency area, with no central economic government, as in the eurozone, there is no possibility of this. Structural regional aid in the EU is far too insignificant to compensate, and is anyway the wrong mechanism.

The basic economics must have been understood by those who constructed monetary union. The vision was, presumably, that it would indeed force federation, with a central government redistributing tax revenues to the poorer regions of the zone.

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