Just two short years ago, it was harder for Americans to justify spending time in Europe. It was much less affordable as the euro hovered near a record high just below $1.60. How things have changed. Today it’s closer to $1.27… down more than 20% on concerns stemming from Greece’s overwhelming sovereign debt.
So, the upside is that visiting Europe is much less expensive right now. The downside? An unraveling euro could set off a strange and potentially drastic set of consequences for the global economy.
"One proposed solution is for these countries to engineer the equivalent of a devaluation – a uniform decrease in wages. This, I believe, is unachievable, and its distributive consequences are unacceptable. The social tensions would be enormous. It is a fantasy.
“There is a second solution: the exit of Germany from the eurozone or the division of the eurozone into two sub-regions. The euro was an interesting experiment, but, like the almost-forgotten exchange-rate mechanism (ERM) that preceded it and fell apart when speculators attacked the British pound in 1992, it lacks the institutional support required to make it work.
“There is a third solution, which Europe may come to realize is the most promising for all: implement the institutional reforms, including the necessary fiscal framework, that should have been made when the euro was launched.”
Unfortunately, the first solution would hurt economically in a way politicians are unlikely to bear. For the second, it’s still quite difficult to envision Germany quitting the eurozone. Finally, the third solution sounds a bit utopian given the inter-state political battleground Europe has been resembling in recent weeks. All three potential solutions are paved with landmines.
If yesterday’s brief but trillion-dollar value wipeout was any indication of things to come, and it probably was, we had better prepare for the worst now. Again though… at least vacations in Europe should be discounted this summer.
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