Henry Farrell has a new article with John Quiggin examining the European debt crisis. They argue that the real problem is creating a solution that's politically sustainable:
If the EU is to survive, it will have to craft a solution to the eurozone crisis that is politically as well as economically sustainable. It will need to create long-term institutions that both minimize the risk of future economic crises and refrain from adopting politically unsustainable forms of austerity when crises do hit. They must offer the EU countries that are the worst hit a viable path to economic stability while reassuring Germany, the state currently driving economic debates within the union, that it will not be asked to bail out weaker states indefinitely.
Henry and I talked about European integration in a Bloggingheads four years ago. Then, as now, I was much more skeptical than he about the ability of European institutions to handle painful EU-wide coordination problems.
I now think there's a less than 50% probability that the euro survives in its current form. The costs of staying in are very high, and as we're seeing in Ireland, the benefits are extremely uncertain.
Farrell and Quiggin make an impassioned plea for a vastly more active Keynesian policy, including mandatory surpluses during good times. But the experience of the US states, I think, points to the limits of rainy day funds (even very prudent states ran through most of their funds pretty quickly). There's very little political support for the kinds of fiscal transfers that ease disparities between American states. And even if there were, Europe's low labor mobility would still mean that there would be much starker disparities between European nations than between American regions.
Under those conditions, it's hard for me to see how a currency union between countries with such disparate insitutions--political, economic, and social--can survive. That doesn't mean it would disappear entirely--a currency union between Germany, France, and the Benelux/Nordics that want to stay in seems potentially more feasible, though still problematic. But I don't think that even Lord Keynes could save the euro in its current form.