Denmark and Norway were the PIIGS of the Scandinavian Currency Union

As the euro crisis continues speculation of an eventual break-up of the euro also continues. There are numerous examples in monetary history of currency unions breaking up. One is the breakup of the Scandinavian Currency Union in 1924.

I have found an interesting paper on this important event in Scandinavian monetary history. In his 2004-paper “The Decline and Fall of the Scandinavian Currency Union 1914 – 1924: Events in the Aftermath of World War I” Krim Talia discusses the reason for the collapse of the Scandinavian Currency Union.

Here is the abstract:

In 1873, Denmark, Norway and Sweden formed the Scandinavian Currency Union (SCU) and adopted the gold standard. The Union worked fairly smoothly during the next thirty years and was partly extended until 1914. The outbreak of World War I triggered a series of events that eventually would lead to the formal cancellation of the union in 1924. The suspension of convertibility and the export prohibition on gold in 1914, opened exchange rate tensions within the union, and acted as a first nail in the SCU’s coffin. Although the countries de facto had their currencies valued at different rates externally, the treaty of 1873 made them tradable at par within the union. This conflict, between de facto situation and de jure regulation, opened arbitrage opportunities for the public; but also resulted in opportunistic behaviour in the relation between the Scandinavian Central Banks. This study of the break-up of the SCU finds that the gold standard functioned as a unifying straitjacket on monetary policy and was an important prerequisite for a monetary union without a common central bank. It also challenges earlier work on the break-up of the SCU, by suggesting that the most important factor behind the centrifugal tensions within the Currency Union was the improved Swedish balance of trade following the outbreak of Word War I. The fact that wartime trade performance differed between the three countries made the currency area face an asymmetric external shock that required an exchange-rate adjustment – causing the fall of the union.

What is the implication for the euro zone? Well, I am not sure, but it might be interesting to have a closer look at the internal trade imbalance in the Scandinavian currency union and compare that to the imbalances that we have seen build in the euro zone during the boom-year prior to 2008. Both Denmark and Norway saw booms (and bubbles) during the first World War years and the early 1920s. In that sense Denmark and Norway looked like today’s PIIGS, while Sweden with it’s increasing trade surplus was the Germany of the Scandinavian currency union. In my previous post I described how insane monetary tightening in Norway and Denmark after 1924 lead to depression, while Sweden avoided depression.

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3 Comments

  1. Thanks for this.

    I’d say the main difference between a setup like the SCU and the modern Eurosystem is that in the former, members retain their own currency, whereas in the latter, they have retired their currencies entirely. Systems like the SCU were more liked fixed-exchange rate regimes that allowed member central banks to accumulate limited debts upon each other. The Eurosystem allows member central banks to accumulate unlimited debts and credits upon each other, and in an automatic way.

    Reply
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