Too big to fail? Maybe, I see that point. But all it would take is Germany to pull out to set it in perpetual free fall. I don't think it will happen, not for a loooooong time at least ...if ever in our lifetimes. (The UK was smart to keep her pound, why Germany made the move is beyond me)

Tom, the Germans joined for largely political reasons and it was far from universally popular among German people, who had an emotional attachment to the Deutschmark. As it happens though, the Germans have benefited enormously from the Euro. It's allowed their export industries to flourish to the extent that they totally dominate trade within the Euro area

Paul Krugman wrote:...the architects of the euro, caught up in their project’s sweep and romance, chose to ignore the mundane difficulties a shared currency would predictably encounter — to ignore warnings, which were issued right from the beginning, that Europe lacked the institutions needed to make a common currency workable. Instead, they engaged in magical thinking, acting as if the nobility of their mission transcended such concerns. --- ...the prospects [in 1992] of a single currency [were] dubious. --- So why did the project proceed? Because the idea of the euro had gripped the imagination of European elites.

Sassenach wrote:I don't think the end is imminent, there's too much political capital invested in the Euro for it to be allowed to fail, and nobody really wants it to.

Javelin wrote:It's not going to be the end of the Euro as far too much political effort and capital has been put into it... After all, it was never set up strictly along economic lines since it was always a heavily political project, and hence cannot fail purely because of economic troubles.

I think hoping that "political capital" can in some fashion substitute for real economic capital, or be "invested" in some way that obviates the realities of economics, is what Krugman meant by "magical thinking". Krugman seems to be saying that in politics, wishing can make it so; in finance, that's much less true, and given enough time perhaps not true at all. It looks like Sass and Javelin are being exemplars of the hopeful but unrealistic thinking Krugman says was the problem in 1992.

For all I know, Sass and Javelin are better economists than Krugman. Seriously. So I'm not saying they are wrong; I'm just pointing out how nicely their wording reflects on what Krugman wrote. That "nobody really wants" the Euro to fail may or may not have power and meaning in the real world of banks and budgets; and maybe it's true that an economic creation "cannot fail purely because of economic troubles" if its origins were "heavily political". But hoping that the desires of people, now or in 1992, can critically influence (i.e. determine) economic/fiscal/financial outcomes would seem to be what Krugman meant by "magic".

Can wishing make it so? Don't get me wrong; I don't know. I really don't.

A separate observation, where irony arises from a situation where it seems the USA has an advantage over Europe because we're more socialistic than they!

Krugman wrote:...the United States works as a currency union in large part precisely because it is also a transfer union, in which states that haven’t gone bust support those that have. And it’s hard to see how the euro can work unless Europe finds a way to accomplish something similar.

In the USA, to a large extent, the rich in New York subsidize the poor in New Mexico. (I live in New Mexico.) They have a higher GDP per capita and a higher standard of living than we, and pay more taxes to the feds per capita than we, but we get more federal subsidies per capita than they in the form of government insurance programs and federal job-creating projects like two major national labs and two major Air Force bases. If New Mexico had a relationship to the USA as a whole that was like Greece's relationship to the rest of the EU, our economy would be more like Mexico's than Massachusetts'.

We New Mexicans think this socialism is great stuff, but sometimes those rich liberals in New York aren't so sure.

Don't get me wrong, I'm certainly no cheerleader for the Euro. I've always been strongly opposed to British entry, for economic reasons rather than emotional ones. The difficulties in accommodating widely different economies within one blanket interest rate always struck me as being likely to create gross inequalities which may turn out to be enormously beneficial to some while being crippling to others. That said though, if there's sufficient political will then it will be possible to save the Euro. It'll require some form of enforced mechanism of fiscal discipline for the weaker, more profligate nations combined with greater direct wealth transfers from the Germans, and to a lesser extent the Dutch and French. This will be painful for all concerned so it will take determined politicians willing to ride out unpopularity, but it can and probably will be done.

In the USA, to a large extent, the rich in New York subsidize the poor in New Mexico. (I live in New Mexico.) They have a higher GDP per capita and a higher standard of living than we, and pay more taxes to the feds per capita than we, but we get more federal subsidies per capita than they in the form of government insurance programs and federal job-creating projects like two major national labs and two major Air Force bases. If New Mexico had a relationship to the USA as a whole that was like Greece's relationship to the rest of the EU, our economy would be more like Mexico's than Massachusetts'.

Small aside. Generally the "have not" states vote republican....ironic.

The concept that large economies somehow subsidize smaller less efficient economies through shared currency is interesting. There is a benefit to having a currency valued lower...and thats in the cost of exports...Germany has rebounded remarkably well from the recession in large part because its exports have been booming. And they are helped by the lower value of the euro...
Germany has some experience with absorbing weaker economies as well. East Germany...
If Germany wants the Euro to succeed it will. There are enough reasons for that to happen. And trying to discern specifically technical reasons from the science of economics (more of an art than a science sometimes) to why the Euro should fail belies one simple truth. All currencies are based upon the faith in the users of that currency that the backers of the currency are strong. So far, Germany has been strong enough to pull along the weaker sisters. Its economic performance since the recession demonstrates that it has the balance and the fundamentals that many other economies have lost over the last 30 years. (It doesn't happen over night.)
By the way, the latest entrant to the EU, and adopter of the Euro, is Latvia. Small, but with a robust economy in really good shape.

Germany was pretty much one of the main architects of the Euro. They have a historical precedent to draw on. Before the various German states unified into the Second Reich in 1871, there was a long period of alignment and union on economic matters, including a currency union.

Germany is also not alone in terms of general stability as an 'anchor' for the currency. The Benelux nations are pretty economically stable. France is not as shaky as many would like to think it is. Italy, Ireland, Greece, Spain and Portugal do have problems, although a lot of that is still really a hangover from the credit crunch - it's their banks that are in trouble, and the governments are not necessarily able to intervene to stop them from failing. As German banks are among the main creditors of Greek and Spanish banks, Germany has a strong interest in not having these countries crash out of the Euro- if they do, they could leave a nasty debt for the Germans.

So, as much as they dislike it, it's probably cheaper for the Germans to bail out the PIIGS nations, to avoid having to bail out their own banks later on.

Here is an interesting article about how the recession and current debt crisis has place Germany in the position of leadership in the Euro-zone and the resentment that is it causing amongst the other nations.

Interestingly, the article says that part of the original intention of the Euro was to act as a check on the newly united Germany, i.e. keeping the unified Germany economy from dominating the continent, and that it has had the exact opposite effect.

I am not very familiar with the politics of the Euro so perhaps our European friends can confirm some of the headlines mentioned in the article and/or whether the above was really mentioned as one of the original purposes of the Euro.

It would never have happened if Germany had not wanted it to. The ECB is based in Germany. They provided a huge amount of capital towards it. While some may have seen German re-unification as a potential threat, for Germany it was costing billions as suddenly they inherited millions of people with no jobs to do and outdated practices where there was work.

It was pretty obvious that Germany would be the strongest economy in the Euro, and would dominate. Had the UK joined, then it may have balanced things out a bit. But we were not going to.

That's interesting Danivon. It seems to be the exact opposite of what the article is implying. Rather is seems to be saying that Mitterand was able to get the others to join by selling the Euro as way to keep Germany from dominating the continental economy. Further the article goes on to say that it worked for at least 10 years. However, it appears to be saying that those 10 years of stagnate growth (oxymoron?) forced Germany to change their economy that lead to the powerhouse it is today.

So I guess the question is kind of chicken or egg. Was the 10 years of stagnation and the changes to the economy a result of the merger of the DDR economy with the BRD or a result of accepting the Euro?

Archduke Russell John wrote:
So I guess the question is kind of chicken or egg. Was the 10 years of stagnation and the changes to the economy a result of the merger of the DDR economy with the BRD or a result of accepting the Euro?

The Germans think it was primarily the unification. They wanted to seize the moment and push the unification through and really underestimated how crappy the DDR economy was. So not only did they have to pay for 16 million people joining their various health/social systems they had to invest huge ammounts in infrastructure and repair enviormental damages due to the general low standard of regulations in the DDR and restart the economy of the east (I think the number is up to 1.5 trillion now).
So when the € came in 2000 the Germans were already tumbling and it certainly added to their crisis, but it wasn't the cause. It forced them to finaly make serious adaptions to their social systems and workplace securtiy laws though and that's what they profit from now.
We in Austria noticed, because in the 70s and 80s it usually was Austrians going to work to Germany and suddenly we have like 100 000+ Germans working here.

Bumping thread. Kicking the can down the road doesn't seem to have worked. IMHO the structural problems with the Euro are not fixable.

I should point out, as someone who lives in the Eurozone, that nobody here has even thought of pulling out of the Euro. I am sure that I would have heard if there had have been talk (it would effect Ireland quite a lot) and there has not even been a whisper.

I think that the fact the political will for the Euro, combined with the German powerhouse economy, will keep the Euro going. What I hope will come out of this is some regulations on the banks to stop this kind of bubble happening again.

If you think about it, even if a country was seriously considering pulling out from the Euro you probably wouldn't hear about it. If a country pulls out of the Euro then it would mean that capital held in that country that was previously denominated in Euros would suddenly be denominated in worthless Drachmas or Punts or whatever. The whole point of leaving the Euro would be in order to effect a massive devaluation that might boost exports, which may well be a good idea in the long term, but in the short term it would certainly mean that anybody who had Euro assets would see the value of their assets drastically slashed almost overnight. The merest hint of abandoning the Euro would result in a mad scramble to get all your money out of the country, which would be disastrous. Realistically it could probably only be done in conjunction with some kind of temporary imposition of capital controls. I'm not sure if that's even legal under EU law, but I assume it probably isn't. This means that there would need to be some backroom deal thrashed out among the member states behind closed doors and then imposed without warning to prevent mass capital flight.

All in all a very messy situation.

First thing that has to stop i think is the ability of financial markets to destabilize whole countries. Yes the Greeks should have to pay for their mistakes but we really can't have banks and private equity send a whole country into a mad revolutionary frenzy. Especially after we had to prop up the crappy financial system with taxmoney in the first place. The way the British and Americans have setup the financial markets to replace their lost industrial base really doesn't work. Especially when crap economies like the spanish or irish follow their lead.

Note that the market's debt worries extended to Spain and Italy today--both far too big for the sort of bandaid bailouts that have kept Greece bumping along for the past year. Very rough sledding ahead in the Euro zone.