This must have made for a tough morning in the FT’s euro-bunker. The paper’s Gideon Rachman admits this:
“After roughly a decade we are discovering that a single currency area, uniting different countries with different levels of economic development – and very different political cultures – is inherently flawed.”
Well, I’m not so sure about that whole “decade” thing: the flaws in Brussels’s Madoff money were visible from the start, but don’t hold your breath waiting for its creators to be called for account. That said, Mr. Rachman gets to the real point here:
The euro is not an end in itself. The single currency is just an instrument, aimed at promoting economic prosperity and political harmony across Europe. As the evidence mounts that it is doing the precise opposite, it is time to think not about how to save the euro – but about how to scrap it, or at least allow the weakest members to leave. The euro has helped both to create and sustain the crisis in Europe. First, it caused interest rates to plunge in southern Europe, encouraging countries such as Italy and Greece to go on a borrowing binge. Now the single currency rules out the options that postwar Italy and others traditionally used to cope with high levels of debt: inflation and devaluation of the currency. Neither policy was cost free, but they provided an alternative to the “internal devaluation” (otherwise known as wage cuts and mass unemployment) that is currently being urged on Italy, Greece and much of southern Europe…
Faced with… mounting problems, the “whatever it takes to save the euro” crowd are left advocating solutions that are less and less credible. If all goes to plan – after debt relief and further austerity – Greece will have reduced its debt to a mere 120 per cent of gross domestic product by the end of the decade. And that is the optimistic scenario. Meanwhile, despite the clear evidence that sovereign debt in Europe is risky, Italy will somehow persuade the markets to go back to lending to it at 2 per cent, rather than 6 per cent or more. In the meantime the European Central Bank will buy junk bonds from Italy without limit, for as long as it takes. None of this sounds credible. On the political side, the long-term fix to the euro’s malaise is said to be a fiscal union, a true political federation. But this is a solution that will take decades to implement, for a crisis that is escalating by the week. The final destination is, in any case, inherently implausible, given the lack of pan-European solidarity revealed by the current mess.
As Mr. Rachman says, breaking up the euro in all or in part will be “fiendishly difficult and dangerous”. The alternative, however, is worse.