The latest bit of euro fantasy has been that a few changes in the top personnel would transform matters. Yet even if you installed a coalition of Pericles and Alexander the Great in Athens and Cesare Borgia and the Emperor Hadrian in Rome it wouldn’t make a blind bit of difference.
What ails these countries is the irresistible arithmetic of the debt trap. The idea of a euro break-up frequently meets with the objection that this would crucify German industry. This is nonsense. The new German currency would certainly go up, I grant you. Indeed, it would need to; that is a key part of the adjustment mechanism. But it would not go up without limit. The Germans were reluctant to give up their Deutschmark which, they said, had been the secret of their post-war success. And now they are reluctant to give up the euro which, they say, is the secret of their post-Deutschmark success!
In fact, German business proved immensely good at bearing the strains created by a strong D-mark and it would again be like this under the “son of D-mark”. Anyway, what German business wants should not be the sole arbiter. A high German exchange rate would transfer income within Germany from businesses to consumers and this would help to boost consumer spending.
Of course, the default and currency depreciation implicit in a euro break-up would be disruptive. But it does not follow that we should try to preserve the status quo by pouring in more money ad nauseam. There will have to be defaults whether or not the euro survives. Europe should not be scattering public money in an attempt to avoid default but rather conserving it for bailing out the banks directly, when necessary.
Moreover, if the weaker peripheral countries left the euro, the inevitable fall in their currencies would boost their net exports and thereby increase their GDP. This would limit the scale of default, to the long-term benefit of creditors, including ourselves. Furthermore, they would be able to finance their public deficits through their own central banks – just as the US and the UK are doing. This would both minimise the need for default and help to boost the economy.
Trying to keep the euro going is like trying to breathe life into a corpse. Europe’s leaders should not be propping the single currency up, like El Cid strapped to his steed, but rather preparing to dismantle it at the lowest possible cost.