How to Save the Euro
EVERY BROKE COUNTRY IS broke in its own way. At least that's true of the European countries that have come to the brink of default since the global financial crisis unleashed waves of economic panic. In Greece, the cause was a love affair with "enormous, unsustainable government budget deficits," In Ireland, it was large homes and a real estate bubble that dwarfed that of the United States. With such different proximate causes, what can the European Union do from on high, "beyond encouraging member states to tend to their gardens"?
It can begin by examining one commonality: At base, both countries were experiencing credit booms that began in 2002, just three years after the introduction of the euro. (Seventeen of the 27 EU member countries have embraced the euro.) European technocrats hoped the euro would create "cohesion" through a rise in per capita incomes in "peripheral" countries such as Ireland, Greece, Portugal, and Italy, bringing them closer to parity with "core" countries such as France and Germany. But instead of converging, the core and periphery grew further apart; Germany enjoyed an export boom, while on the periphery, foreign capital financed consumption, not investment.
Though it's unclear whether these booms were caused by the euro, argues Barry Eiehengreen, an economist at the University of California, Berkeley, there is no doubt that the EU needs to undertake serious reform to prevent future boom-and-bust cycles. He prescribes several measures, all of which would strengthen the hand of the EU relative to national governments. …