The Australian's Adam Creighton brilliant again on currency unions and moral hazard

I don't think there is an economics writer in the country with Creighton's courage or horsepower. Last week's column on bank subsidies was head-and-shoulders above anything that has been produced by journos locally. This weekend's contribution on currency unions is similarly sublime:

The lesson not learnt from history appears to be that monetary unions are durable when the different regions also share a strong political harness. In his seminal article Mundell noted: "In the real world currencies are mainly an expression of national sovereignty, so that actual currency reorganisation would be feasible only if it were accompanied by profound political changes."

Europe's political changes have been profound since World War II, but euro area governments still have ultimate political authority within their jurisdiction.

Sovereign governments within larger currency unions have too much incentive to over borrow in the knowledge other members will pick up at least part of the tab. Big global lenders know this too, which is why they suddenly lent vast sums to Greece and Spain on more favourable terms once those countries started using the euro.

The parallels between LMU and Europe's latest monetary experiment should not be exaggerated though. Differences between the European money system of the late 19th century and today are likely to be more salient, and instructive, in coming years.

Europe today is a conglomerate of bloated socialist governments whose economies trade on the basis of paper money, reliable only so long as people maintain faith it has value. In the 19th century governments were tiny, laws few and money was hooked to commodities such as gold or silver.

Paper money has allowed the ratio of credit and loans to economic output to surge to historic highs while banks' capital holdings have shrivelled. Still, the world is awash with money yet languishes in an economic funk.

As Milton Friedman wrote, the world's experiment with competing fiat currencies, which began when Richard Nixon severed the US dollar's link with gold in 1971, has no historical precedent. Thinkers from Voltaire to George Bernard Shaw were doubtful such an arrangement would last, based on history. Unless these men were wrong, policymakers will have to start asking not whose money they should be using, but what sort.