Currency disunion
Source: www.economist.com (Adapted)
Apr 7th, 2012
The Irish left the sterling zone. The Balts escaped from the rouble. The Czechs and Slovaks left each other. History is littered with currency unions that broke up. Why not the euro? Had its fathers foreseen turmoil, they might never have embarked on currency union.
The founders of the euro thought they were forging a rival to the American dollar. Instead they recreated a version of the gold standard abandoned by their predecessors long ago. Unable to devalue their currencies, struggling euro countries are trying to regain competitiveness by “internal devaluation”, ie, pushing down wages and prices. That hurts: unemployment in Greece and Spain is above 20%. And resentment is deepening among creditors. So why not release the yoke? The treaties may declare the euro “irrevocable”, but treaties can be changed.
One reason the euro holds together is fear of financial and economic chaos on an unprecedented scale. Another is the impulse to defend the decades-long political investment in the European project. So, despite many bitter words, Greece has a second rescue.
So the euro zone remains vulnerable to new shocks. Markets still worry about the risk of sovereign defaults, and of a partial or total collapse of the euro. Common sense suggests that leaders should think about how to manage a break-up.
