Wednesday, August 03, 2011

Crisis of Integration

The trouble with the Euro is that Europe is inhabiting a metastable financial state that can't be maintained. If the countries currently in trouble could just devalue their currencies there would be a feasible if painful way to get back to financial stability. The Euro manacles prevent that.

Bloomberg thinks that the way forward is to push integration further:

To restore confidence, Europe’s leaders -- specifically German Chancellor Angela Merkel and French President Nicolas Sarkozy -- must demonstrate they are willing and able to fix the flaws in the currency union that the crisis has laid bare.

As Bloomberg View has advocated, any comprehensive solution will probably entail creating a finance ministry with the sole power to issue euro bonds backed jointly and severally by all the nations of the union. It will also involve fiscal transfers that, like earned-income tax credits and unemployment insurance in the U.S., ease the pain of wage and competitiveness adjustments that states in a currency union inevitably must undertake.

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Ultimately, like the debt crisis in the U.S., Europe’s challenge in resolving its problems boils down to a fundamental social question: Can Germans and Greeks, rich and poor, find common ground? If they can’t, the advanced world is headed down the path to polarization. History suggests it wouldn’t end well.

Comparison to the US is certainly not encouraging. I can't see it happening - Germans and the North will reject pain today and risk further pain next year - or tomorrow.