Issue of the week: Can the euro survive?

last updated 8 January 2015

So this is what it looks like when a currency dies, said David Marsh in The New York Times. The dream of a Europe-wide currency, created a decade ago to stimulate cross-border trade, promote political unity, and keep in check Germany’s ambitions for economic dominance of Europe, has turned into a nightmare. The euro is crumbling, with its value sinking briefly this week to a four-year low against the dollar, as the 16 nations of the European currency union—the so-called euro zone—squabble over the debts run up by its most profligate members, beginning with Greece. The euro zone’s finance ministers now say they’ve resolved that spat, but that just means that the countries of Europe will “spend colossal sums of taxpayers’ money they cannot afford to heal mounting internal disparities they cannot conceal to shore up an edifice many believe cannot stand.” Investors are understandably skeptical that this hasty fix will work. It seems more likely that members will “choose to return to their former currencies—or they may be asked to do so by other states.”

The euro-zone countries face a stark choice, said Matthew Lynn in Bloomberg.com. Either they “create a genuine fiscal and political union or let the euro die a slow death.” But the obstacles to such a union are formidable. No elected head of state will surrender control of spending to the bureaucrats in Brussels, where the European Union is headquartered, especially during a recession. The tensions between Europe’s haves, led by Germany and France, and its have-nots, including Portugal, Italy, and Spain, as well as Greece, will continue to weaken the union, and “in a few years we’ll be talking again about the deutsche mark, the franc, and the peseta.”

Not necessarily, said Martin Feldstein in The Washington Post. The euro can be saved if the euro-zone countries take a cue from the U.S., where the 50 states have managed to co-exist while sharing a common currency—the dollar—while setting their own budgets. They can do so because while states are allowed to borrow to fund capital investments such as roads and schools, they are prohibited by state constitutions from borrowing to meet operating expenses such as payroll. As a result, state budget deficits stay relatively small—even California’s is only about 1 percent of its total economic output. The euro-zone countries can adopt similar constitutional limits on borrowing. Such measures would “leave member governments free to determine the structure and levels of their taxes and spending, as long as their decisions did not violate their self-imposed constitutional limits.” This may be a long shot, politically, but if Europeans really want to save the euro, long shots may be their only options.