In 1997, Martin Feldstein wrote “EMU and International Conflict,” an essay arguing that European monetary union could heighten tensions within Europe and between Europe and the United States. At the time, the article was widely dismissed as alarmist, and it has been a source of mirth in the years since. Here is an excerpt from the abstract:
A European central bank would be unresponsive to local unemployment, while political union would remove competitive pressures within Europe for structural reform, prompting protectionism and conflict with the United States.
Now, it’s clear that the PIIGS are not at war with Germany. But is it safe to say that the failings of the euro have exacerbated tension within the EU? As Greece and Germany trade accusations back and forth, as the likelihood of a Greek default grows by the day, one gets the impression that Feldstein is on to something.
And Paul Krugman is now all but calling for the euro to be dismantled, or rather pared back as Greece and potentially other vulnerable states withdraw:
Think of it this way: the Greek government cannot announce a policy of leaving the euro — and I’m sure it has no intention of doing that. But at this point it’s all too easy to imagine a default on debt, triggering a crisis of confidence, which forces the government to impose a banking holiday — and at that point the logic of hanging on to the common currency come hell or high water becomes a lot less compelling.
And if Greece is in effect forced out of the euro, what happens to other shaky members?
Fascinating stuff. My sense is that we’re at the start of an international shakeout, not the end.