In 2008 I vehemently objected to the decision to have a monetary union between Sint Maarten and Curaçao in anticipation of the political dissolution of the Netherlands Antilles (consisting of Curaçao, Sint Maarten, Bonaire, Sint Eustatius and Saba) on October 10, 2010. My reasoning for disagreeing was never judged on its merits. Instead, I was criticized because I was part of government and was apparently not allowed to have a dissenting opinion. Some newspapers even speculated that I was sure to be booted from the Cabinet and the political party to which I belonged. None of that happened, but the monetary union did become a reality.
The common definition of a monetary union is two or more countries with a single currency, one central bank, one monetary policy and convergence of macroeconomic policies.
So what were my objections back in the day? First of all, history backed me up. There are dramatic illustrations of how monetary unions collapse after the political breakup of countries. I will not mention those that went belly up before the 20th century, but will instead concentrate on the 20th and 21st century. When the Austral-Hongarian constitutional union was dissolved in 1914, so did its monetary union and the common currency, the crown. The Soviet Union (USSR) broke up in 1991 and the USSR’s state bank was replaced by 15 central banks. Other examples include the breakups of Yugoslavia, and the State Union of Serbia & Montenegro, South Sudan that separated itself from Sudan and Eritrea that gained its independence from Ethiopia. Heck, we don’t even have to look very far. After Aruba broke off from the Netherlands Antilles in 1986, it did not form a monetary union with the (remaining islands of the) Netherlands Antilles. Aruba must have read and understood the history books about monetary unions after countries call it quits and abandon their former political unions. There is just one exception history tells us. When the Czechs and the Slovaks abandoned Czechoslovakia, they initially decided to swim against the current and formed a monetary union which lasted a whopping 38 days!
When political unions dissolve in separate countries/entities, this is done so that each party can pursue its own policies. Usually this separation comes after profound differences and policy discords. Parties to a monetary union, as we have seen before, are forced to coordinate and/or harmonize certain macroeconomic policies. So why would they want to do that after just being separated? If that were the case there should not have been any need for a separation in the first place one could easily argue. So why did Sint Maarten and Curaçao form a monetary union? It was politically motivated. The Netherlands simply did not trust Sint Maarten to have it’s own central bank. So no monetary or macroeconomic arguments were used to arrive at this decision. Economists know very well that the theoretical analysis of a monetary union is first and foremost based on the theory of an optimum currency area (OCA) that was first developed by Nobel Prize winner in economic science, Dr. Robert Mundell with its emphasis on among others symmetry of business cycles and mobility of the factors of production i.e. land, labor and capital. None of that happened. The Netherlands forced this down our throats otherwise the dissolution of the Netherlands Antilles would not have happened. None of us were prepared for this decision. As a matter of fact, in 2009, one year before the monetary union would come into being, the politically responsible authorities for economic affairs of Curaçao and Sint Maarten were gathered in Curaçao for a public presentation at the University of the Netherlands Antilles. I was then State Secretary of Finance of the Netherlands Antilles and after their presentations on how they saw economic development after the breakup of the Netherlands Antilles, I asked them what they were doing regarding policies that would have to be in place for the then upcoming monetary union. I never knew politicians could stare at each other and the public at such a complete loss for words. More surprising to me however was the fact that a member of management of the Central Bank uttered that the monetary union will work because these two countries used to be together in one union, the Netherlands Antilles. Exactly, used to be together.
And under this misguided premise we started the union thinking it would work without even taking a single measure for convergence of macroeconomic policies. As a matter of fact, I dare anyone to find a passage in the government programs of Curaçao or Sint Maarten that refers to concrete matters on coordination of policies in order to make the union work. According to the Minister of Finance of Curaçao (2012-2016), when I questioned him in Parliament, the monetary union was not a priority. Meanwhile under the watch of governments, the board of supervision of the Central Bank of Curaçao and Sint Maarten, we continue to think that somehow this monetary union will spontaneously function and be a success by pretending it doesn’t even exist. In fact, the Ministers of Finance of Curaçao and Sint Maarten haven’t even formally spoken to each other about this matter in over two years. To date, the is no mechanism, not even on paper, in place to coordinate policies relevant for the monetary union. It is as if no one wants to end the union, but instead prefers that it withers away, slowly and painfully. The best option is to start taking steps to dissolve the union. However close Sint Maarten and Curaçao might have been before the dissolution in 2010, fact is that we have drifted more apart and have much less in common today. If history is our guide, we should end this and go our separate ways. The second best option is to, for the first time in 7 years, have both parties unequivocally state their political commitment to the monetary union. On numerous occasions Sint Maarten has hinted it wants to opt out of the union. In Curaçao there is also a group that wants to leave this forced monetary marriage. In any case, if we want to move forward with the union – I think it is a little too late for that – there can be no clouds of doubts. And once this issue is resolved we must quickly invest in mechanisms to make it work. Not doing anything, as we have been doing since 2010, will lead to a slow, painful and costly death of this union. Let’s hope the authorities in Curaçao have the guts to make a choice.
Alex David Rosaria Blog 