Is The Euro Doomed?

by Stuart Shapiro

First Greece, then Italy, and last week Cyprus.  Slovenia is next.  As Europe teeters from potential disaster to disaster, it is worth asking the question on everyone’s mind.  Matthew O’Brien has the answer:

The euro is the gold standard minus the shiny rocks. Both force countries to give up their ability to fight recessions in return for fixed exchange rates and open capital flows. But giving up the ability to fight recessions just makes it easier for recessions to turn into depressions. And that puts all of the pressure on wages to adjust down when a shock hits — the most painful and destructive way of doing things. . .

Debtor-euro countries are to cut wages and deficits, but creditor-euro countries aren’t forced to increase wages and deficits. Perversely, the opposite. In other words, northern Europe isn’t doing enough to offset the demand destruction in southern Europe. And it’s sinking them all. Even worse, this slow-motion collapse is turning loans that would have otherwise been good into losses — losses that force bailouts and faster collapses. But, to be clear, this isn’t only a problem for the periphery. As the U.S. and France found out in the 1930s, it’s generally not a good idea to force your customers into bankruptcy. That just creates depression without end — until the gold (or euro) standard ends. It’s no coincidence that the countries that ditched the gold standard first recovered from the Great Depression first.

How the end of the Euro materializes matters a great deal.  It will determine whether the rest of the world gets pulled into Depression too.  But make no mistake, it seems like the Euro is on its way out.

By: Stuart Shapiro

Stuart is a professor and the Director of the Public Policy
program at the Bloustein School of Planning and Public Policy at Rutgers
University. He teaches economics and cost-benefit analysis and studies
regulation in the United States at both the federal and state levels.
Prior to coming to Rutgers, Stuart worked for five years at the Office
of Management and Budget in Washington under Presidents Clinton and
George W. Bush.