Eurolicious

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Sorry to link Clive so much in one day, but a) he's brilliant and b) I've got a lot of backed up posts on non-Asian topics from my travels. He writes, about Barry Eichengreen's take on the euro:

Barry Eichengreen has a post on Voxeu about how difficult it would be for a country to make an orderly exit from the euro. (The column draws on a longer NBER working paper.) The strength of the euro is squeezing Europe, and especially Italy, very hard. There is some talk of pulling out of the euro system. If only. Italy would surely benefit if it could. But, as Eichengreen explains, it literally cannot without precipitating a really fearsome financial crisis. . . .

A cynic's instinct would be to say that scholarly articles explaining why the euro system cannot break up mark the beginning of the end--but Eichengreen's logic seems impeccable. Italy would surely have been better off if it had never joined the system (an isssue Eichengreen does not go into here), but it is too late for regrets now. The title of the column is the only mistake I can see. "The euro: love it or leave it?" That surely ought to be: "The euro: like it or lump it [no question mark]."

Italy, for those who haven't been following along at home, has been badly squeezed by the euro for several reasons: first, it used to depend on serial devaluation to keep its manufactures competitive in the export market; and second, its economy is not quite in sync with the other two big economies (Germany and France), which means that the central monetary policy does not quite fit with what's happening in the local economy. (Ireland has the same problem, in other direction: its government is laboring mighty hard to keep growth under control).

I'm inclined to be more pessimistic than Messrs Crook and Eichengreen, but this may only be my youth speaking. I look at places like Argentina, which couldn't exit its dollar peg without a horrendous financial crisis, but eventually had to anyway, because the consequences of staying were worse. Italy's government is currently coping with permanent low growth and a creeping budget gap, but any number of nasty surprises could make its position untenable over long years. Moreover, once the first country exits the euro, the credibility of the currency takes a blow, which makes successive exits more likely.

Overall, I'd place the odds on the survival of the euro at about 50%, which makes me definitely a euro-skeptic. Europe is not an optimal currency zone. America isn't either, but we have a lot of things that make it tenable: high labor mobility (so depressed regions depopulate rather than stagnating), high capital mobility, and automatic fiscal stabilizers that transfer federal money, in the form of things like unemployment benefits, to depressed areas. These are no panacea, but they make the dislocations of central monetary policy bearable. Europe, on the other hand, is full of people who stay where they are no matter what the economy does, and the EU government does not, broadly speaking, transfer money by local need. At some point, I find it easy to imagine that the costs of exit could be outweighed by the costs of staying, particularly as euro-enthusiasm wanes.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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