Wednesday, January 12, 2011

What happens to the Euro?

One of the best articles I’ve read so far about what is likely to happen in the Euro-zone over the next couple years.

The “easy” solution is to hope that economic growth will raise all boats and that eventually the debts will become manageable.

If this doesn't work out, then solving the problem is a political, not an economic issue. How will the pain of adjustment be shared? Each solution (default, leaving the euro, inflation, raising taxes, austerity, etc) assigns costs to a different group.

This doesn’t mean that there aren’t “win/win” solutions to this problem, but these all require a high level of trust and co-operations. Germany has been fundamentally unhelpful in this aspect, a large part due to the lack of leadership of Merkel. She has repeatedly placed narrow domestic political calculations (remember how she let the Greek crisis fester for weeks because she had a regional election to worry about?) ahead of finding pan-European solutions.

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