It has become clear that in economic terms, the Euro does not work. Parts of the Euro area would surely have been better off – at least economically – if they had never joined.
However, the costs of breaking up the Euro appear far greater than the benefits at this stage. As a result, the European Monetary Union will not be dissolved, according to UBS economist Paul Donovan.
He suggests that it would be far better to have a default within the Euro, than to incur the political, economic and potentially social costs of trying to survive outside.
While the concept of fiscal transfers across different regions within a monetary union typically suggests a degree of political union, this does not have to be the case, the economist said. “Monetary unions entail sense of economic community.”
The Euro area is not generally viewed as an “optimal currency area”
since economies are diverse enough that external shocks impact them to
different degrees.
Mr. Donovan argues that wealthier areas should therefore subsidize those parts of the monetary union that are at an economic disadvantage, noting that fiscal transfers are the price to be paid for a union of any meaningful size. In other words, “Germans should pay for Greek pensions.”
In December 2001, then European Union Commission President Romano Prodi wrote in the Financial Times: “I am sure the euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created.”
This may not be the crisis, the UBS economist noted, but it has probably brought Europe closer to the point where institutional reform is required. “For any monetary unions to survive, the costs must not persistently outweigh the benefits.”
Photo: A teller counts euro banknotes inside a National Bank of Greece branch in Athens February 10, 2010. Greece's debt crisis has shaken the entire currency union. (REUTERS/John Kolesidis)