The future of the eurozone

23rd August 2012

The author of the piece in the Spanish newspaper El Pais starts from the position that the risk of member states exiting the euro has increased markedly. This, however, rather grates with the metaphor of the lobster trap. Instead a more comfortable fit would be that the risk of exit is now perceived to be more likely, while the reality is as remote or as impending as it has been since the onset of the crisis.

If short term fixes to sovereign debt problems from European policymakers have bought nothing but time, then the discussion on a euro break-up represents one long-term policy choice. The other, and as least as likely route, is further integration. Gauging the likelihood of either is simply an exercise in speculation.

There are, of course, various takes on what appears at first glance to be a binary choice and it is in these complexities (not the broader debate) that interesting policy discussions can be had. Indeed many of these have already begun.

Professor Steve Keen, for example, has suggested that the euro be transformed into a version of the International Monetary Fund's (IMF) Special Drawing Rights. National currencies would be reintroduced, initially at parity with the euro before being allowed free-float for a period in order to find a suitable exchange rate for each.

Meanwhile Senexx, editor and blogger at Modern Money Mechanics, claims that it doesn't matter which of the choices policymakers ultimately take between integration or break-up as long as they choose one or the other quickly:

"You have a supranational monetary authority; now just give them a supranational fiscal authority.  Everything else dragging on coming up with complicated rules and debt haircuts just prolongs a eurozone recession – Europe wide. There are other alternatives like coming up with a two-tier Euro and countries exiting.  These things will cause political turmoil but it will be short-term."

This theory is supported by Cullen Roche of the Pragmatic Capitalism blog who says that ultimately the bond markets are responding to solvency risk in the peripheral eurozone. If a framework was put into place to alleviate the solvency problems – that is, give the market confidence that struggling states won't default on their debt – then the "bond vigilantes" will back off.

While it is unclear which, if any, of these discussions will offer the best solution for the current woes of Europe's monetary union what differentiates them from the mainstream debate is their ability to see through the crisis to potential solutions. Ultimately it may not matter which way policymakers turn but all these interlocutors agree the apparent inability to make any decision remains the most pressing threat to the region's stability.

There is a future for Europe. It's about time the discussion shifts to what the citizens of these countries want it to look like.


More on Mindful Money:

How exactly can the ECB 'save the Euro'?

Interviews: The New Economists

Can the Eurozone be saved without a treaty change?

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