Ending the Euro: An Impermissible Discussion?

The Eurozone remains an economic basket case, creating neither jobs nor economic growth. The Eurocracy is now abuzz with more policy proposals that will allegedly save the common currency. To this outside observer, the most remarkable aspect of each subsequent round of Europanic is how few policy insiders are willing to revisit the fundamental premise that Europe needs this floundering banknote at all.

Economists have noted that from its conception the Euro was deeply flawed. Giancarlo Corsetti argues that the Eurozone does not actually protect against the “original sin” of borrowing in a foreign currency while ability to pay is in a domestic currency. NYT columnist Paul Krugman puts it more sardonically:

the euro was best understood as a plot by Italian technocrats to get themselves German central bankers.

This was not, it turns out, a good idea.

I am not an economist, but my own discipline of psychology would support another fundamental critique of the Eurozone: it falsely assumes that re-arranging the consequences of and responsibilities for financial decisions would not affect subsequent financial decisions by participants (be they individuals, businesses, elected officials or bankers).

Not incidentally, European economies can prosper without the Euro. Eurozone non-members Sweden, The Czech Republic and The United Kingdom currently have employment and growth levels that put the Eurozone to shame.

But if you talk to many Europeans policy elites and chattering class members, to even broach the possibility of ending the Euro is apostasy. Part of this reaction stems from the usual culprits when a big government program is not working: Sunk costs, inertia and insiders not wanting to lose power and face. But if you dig not far below that, you often find intense emotion that comes from the memory of Europe’s traumatic 20th century.

If I put my Euro-devoted friends’ concerns into a few sentences it would go something like this: “Never again must Europe be divided. History teaches us that ever-greater European unity is all that stands between us and the rise of right-wing populist movements and war.” The more candid ones would add “Restraining Germany’s desire to control Europe is critical for peace”.

We should learn from history, including its horrors, but this argument doesn’t hold together. First, far-right populist political parties are doing well across the Eurozone, and the Euro’s economic squeeze is part of the fuel that feeds them. Second, abandoning the Euro would still leave intact the European Union, which ties together its member states in many profound ways that increase interchange, understanding and the prospects of enduring piece. Third, Europe attained over a half century of peace before the Euro was created. Last, in terms of fear of German domination, could anyone in Italy or Spain or Greece give a speech with a straight face arguing that the Euro is lessening German influence in those countries?

I have neither sufficient knowledge nor expertise to be certain that the Euro should be abandoned. But I am quite sure that reflexive, strident refusal to even allow that option to be seriously discussed is a disservice to the continent’s interests.

[Cross-posted at The Reality-Based Community]

Keith Humphreys

Keith Humphreys is a professor of psychiatry at Stanford University. He served as a senior policy advisor at the White House Office of National Drug Control Policy from 2009 to 2010.