A split euro is the solution for Europe's single currency - Joseph Stiglitz

In this opinion paper, he develops an analysis alas too familiar to us:

The problems with the structure of the eurozone may be insurmountable

...Put simply, the euro was flawed at birth. It was almost inevitable that taking away two key adjustment mechanisms, the interest and exchange rates, without putting anything else in their place, would make macro adjustment difficult. Add to that a central bank mandated to focus on inflation and with countries still further constrained by limits on their fiscal deficits, the result would be excessively high unemployment and gross domestic product consistently below potential output. With countries borrowing in a currency not under their remit, and with no easy mechanism for controlling trade deficits, crises too were predictable.

The alternative to adjusting nominal exchange rates is adjusting real ones -- having Greek prices fall relative to German prices. But there are no rules in place that could force a rise in German prices and the social and economic costs of forcing Greek prices to fall enough are enormous.

Stoglitz then mentions the same set of measures as in the paper quoted in this diary. However, he recknons that, given the current political situation in Germany, it is unlikely to happen:

But these seem well beyond the politics of Europe today, with Germany still arguing that "Europe is not a transfer union".

Not unlike ARGeezer's suggestion, he thinks that a NEURO/SEURO system could be the solution:

It is important that there can be a smooth transition out of the euro, with an amicable divorce, possibly moving to a "flexible-euro" system, with say a strong Northern Euro and softer southern euro. Of course, none of this will be easy. The hardest problem will be dealing with the legacy of debt. The easiest way of doing that is to redenominate all euro debts as "southern euro" debts.

While I agree with the pessimistic diagnosis, in my humble opinion, both ARGeezer and Stiglitz are reasoning in a politically ideal world: they do not take into account the European political landscape and the complexity of the relationships between countries, as well as the psychology and the motivations of the leaders.

A "smooth transition" is not going to happen. Leaders who will be seen as downgrading their country to a "second-rate" currency would most probably pay it dearly politically. People would certainly prefer to revert to national currencies. Indeed, the current leading parties will not move until a major crisis happens.  

So any solution - be it the break-up of the Eurozone or significant changes to the treaties like the ones proposed by Stiglitz - will require a major crisis. And a major crisis could make it possible to unlock the German obstruction to changes towards a transfer union.


"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet