Lars Christensen has a great new post on the “Fatal Conceit” of the euro in which he provides answers to these pointed questions: Would Europe be having successive financial crisis, resulting political chaos, and far left or right radicals being voted into power in various places?
It’s a great read and I agree in principle with every point, though I am not necessarily certain it can be wrapped up in black or white, with or without the Euro. Certainly, Europe would be better off today without the current construct of the Euro. But I do not view this as a defect of the euro or the EZ, per se.
To illustrate my point, I’ll use the example that many Market Monetarists believe that the financial crisis in the US started in September of 2008 when NGDP was allowed to plunge. From my point of view, however, it actually began with the unannounced 2006 adoption of explicit inflation targeting that weighted headline CPI more heavily, with the September 2008 date as more of an absolute last chance for the Fed to detect its error and avert disaster, which it failed to do.
That doesn’t make the financial crisis and related debt and political crises in the US a defect of the dollar. Nor was the failure of the Fed to recognize error and mitigate the damage for years after the disaster a defect of the dollar. The dollar was simply the resource that was mismanaged to the extreme detriment of the financial and political health of the nation.
The makings of the financial crisis in the US was a legal and political problem, as the current state of monetary policy is still today, and I see very little difference in the case of the euro, except that the EZ lacks some institutions that function, in a sense, as shock absorbers. The ECB functions more like the central bank for Germany, in a similar fashion as the Federal Reserve conducts monetary policy for the US that is oblivious to the existence of foreign dollarized economies, than it does as a central bank for all of the EZ. It also does not appear to take responsibility for nominal shocks, and is not much more than a multi-national banking cartel that is interested in politics.
These are not easy problems to solve. But they are solvable by implementing appropriate reforms in the legal foundations of the ECB.
If those reforms to the legal foundations of the ECB and establishment of other institutions that function to mitigate debt problems caused by negative nominal shocks are impossible, then I think I would have to agree that the problem is the euro and Europe in general is better off without it. But I don’t think I would let Germany off the hook so easily as to blame an inanimate object for the failure of the European project. The status quo is Merkel’s mess.