The Euro Awaits Its Verdict

The recent Greek elections have brought more radical parties to the fore. Alexis Tsipras, the head of the Coalition of the Radical Left has a valid point: internal devaluation – cutting wages and prices – is failing as a strategy. His alternative appears to be to abandon the euro. If Greece can’t do better than this, he argues, then it should leave.

But this is not about Greece any longer. Italy, Spain, Portugal, and even Ireland face the same issues, but are at an earlier stage in the backlash. Unemployment is rising, their economies are not becoming more competitive, and the interest rates on their debt continue to rise. These countries may eventually decide to leave. And, even if they don’t make that choice, fear of such exits can easily become self-fulfilling.

The euro system was designed to deliver prosperity and stability for all. It has clearly failed for some countries, and it may fail for many. Severe mismanagement by European politicians has caused damage that will last for decades.

Perhaps a stronger fiscal union, a central ministry of finance, and debt sharing would reduce the difficulties and imbalances enough to allow the euro to survive. Perhaps adjustment will start to work just in time.

There is a lot of shouting in the jury room. Expect a verdict soon.

Peter Boone, Chairman of Effective Intervention at the London School of Economics' Center for Economic Performance, is a principal in Salute Capital Management Ltd. Simon Johnson, a former chief economist of the IMF, is co-founder of a leading economics blog, http://BaselineScenario.com, a professor at MIT Sloan, a senior fellow at the Peterson Institute for International Economics, and co-author, with James Kwak, of White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.

Copyright: Project Syndicate, 2012.www.project-syndicate.org

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