MEGAN MCARDLE: The Euro In Crisis.
I’ve been making the argument for a long time–at least seven years in print, and in private before that–that the eurozone looks about as stable as the Unabomber. Especially when you have a fiat currency, you need to think about what makes an optimal currency zone–the largest unit that can easily share a unit of money. The euro countries are not an optimal currency zone: their economies do not move in sync, and they are not fully integrated. That means that at any given time, monetary policy will be too loose for some countries, too tight for the others–Italy was in recession even as Ireland was overheating.
That’s not necessarily fatal–the United States isn’t an optimal currency zone either, since the state economies have their own local business cycles which can be quite different from the country as a whole. But over the centuries, the US has evolved a number of ways to mitigate these stresses. . . . In today’s Financial Times, Martin Wolf finally says what I’ve been thinking: “the eurozone, as designed, has failed.” As the PIIGS teeter on the brink of insolvency, the central banks are financing their banks–and the governments–by accepting discounted public debt as collateral. And because of the interlinkages between creditor-nation and debtor-nation banks, practically speaking, the Bundesbank is now guaranteeing all that debt. Cosigning a loan for someone with shaky credit is a very risky activity; there’s not much evidence that it works better at the international level. The picture Wolf paints is pretty dire.
If the Euro were not in crisis, I think the dollar would be in much bigger trouble than it is.