Three ways to save the euro that won’t work

Ideas that won't save the euro: decreasing wages, dividing the eurozone, or implementing institutional reforms.

Michael Probst/AP Photo/File
The Euro sculpture is see in front of the European Central Bank ECB in Frankfurt, Germany, in this Sept. 2, 2009 photo. Alarmed by the risk to the euro, the European Central Bank exercised what analysts called its "nuclear option" early Monday, announcing it would intervene in bond markets as part of the wider effort to protect the eurozone. The central bank for the 16 countries that use the euro said its move was designed "to ensure depth and liquidity in those market segments which are dysfunctional." The announcement was part of a decision by the European Union and International Monetary, who pledged nearly US dlrs 1 trillion to defend the euro and the eurozone.

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.

Nobel Laureate Joseph Stiglitz further describes the challenge…

"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.

Visit Project Syndicate to read more about whether or not the euro can be saved.

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