All of this assumes that Spain, Portugal, Italy, Greece and whatever other countries join a Seuro would actually pursue saner fiscal policies than they currently do as part of the Euro area. With the exception of Greece, their governments are all pretty right-wing right now, and have not shown any tendency to challenge ECB policies.

Euro interest rates and valuations are both pretty low for a few years now and no bar to getting their economies moving again. Devaluation can be a double edged sword, as it increase the burden of external debt held in Euros or $ or other external currencies and offers only a temporary reprieve in terms of improving cost competitiveness. Insofar as they seek to fund their deficits on sovereign debt markets, they would also have to pay a considerable risk premium on debts due to the risk of further devaluation and/or default.

Those economies do not trade with each other any more than they trade with their northern neighbours, and so wouldn't necessarily constitute an optimal currency area any more than they do now.  Ireland used to be in a currency union with the UK but had no control over Bank of England policies and the frequent bouts of devaluations and very high interest rates suffered by Sterling then did us no favours.  It made sense when 70% of our trade was with the UK, but no sense when our objective was to reduce our dependency on the UK as part of our wider project to integrate with the EU. Trade with the UK is now down to 15% and no one is even talking about re-joining a currency Union with Sterling or leaving the EU along with the UK.

The huge trade surpluses Germany runs with the rest of the Eurozone remains the key destabilizing factor and the Growth and Stability pact needs to be amended to penalise structural surpluses as much as deficits. I'm not convinced that a Seuro would address that problem much more effectively even with ongoing devaluations, and the overall effect could well be to tear the EU apart. There is no quick fix to the underlying problem - gross inequalities in economic development - which needs to be addressed at both a national and an EU level.  That was a problem before the Euro was ever created and would outlive its demise, if it comes to that.

Index of Frank's Diaries