Issue of the week: What’s wrong with the ‘euro-zone’?

The 16 nations that use the euro as their common currency face a wrenching choice, said Floyd Norris in The New York Times. Do they hang together or hang separately? They’re forced to ask this question because at least four members of the so-called euro-zone—Portugal, Ireland, Greece, and Spain, known collectively as the PIGS—are wrestling with crippling budget deficits. Greece is the sickliest, with a deficit equal to 12.7 percent of its gross domestic product, well above the 3 percent ceiling mandated for members of the euro-zone. If its finances continue to deteriorate, it could default on its government bonds. France and Germany, “the central core of the euro bloc,” must now decide whether to bail out their troubled neighbor or let it default—“an outcome that would have major repercussions for Europe and financial markets worldwide.” Indeed, worries over Greece’s finances spilled over into the U.S. stock market this week, helping drive the Dow Jones industrial average below the psychologically important 10,000 barrier for the first time in three months.

Greece’s budget crisis has exposed the euro-zone’s fundamental weakness, said Ralph Atkins and Kerin Hope in the Financial Times. When the nations of Europe formed their monetary alliance in 1999, they opted to share a single currency but allow each member state near-total political and budgetary autonomy. Under this arrangement, the Greek government was free to run up crippling debts while avoiding the painful political choices needed to bring those debts under control. The European Central Bank is now scrambling to repair the currency structure, initially by pressing Greece to “plug gaping holes in its budget” and imposing “the strongest surveillance measures ever” to ensure that Athens maintains fiscal discipline.

Over the longer term, central bankers have an opportunity to craft “a lasting solution” to the euro-zone’s structural defects, said Matthew Lynn in Bloomberg.com. The first step for the European Central Bank is to “stand firm and refuse to offer a bailout.” The currency union “can’t survive if members can accumulate huge debts and get other countries to pick up the bill.” Let Greece negotiate with its creditors and work out a plan to pay off the debt at a discount. Corporations negotiate such debt restructurings all the time, and “there’s no reason a euro-area country shouldn’t do the same thing.” Then the Central Bank needs to create a mechanism that enables it to extend emergency loans to a troubled member in exchange for a significant degree of control over that country’s economic policies. After all, “it is often a lot easier for an outside body to impose tough changes than it is for locally elected politicians.” Europe’s currency union has deep flaws. Now is the time to fix them before they become fatal.

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