Euro Chat

Angela Merkel's recent visit to Greece is a reminder that the Euro crisis rumbles on. I've mused before on the likelihood, or otherwise, of the Euro surviving - with my "man-in-the-street-no-I'm-not-an-economist" hat on. My untutored view has been that the Euro zone was an economic backdoor to an, at the time (and still now), unachievable political aim - i.e. political integration of Europe quite probably as some sort of federation.

Recently a kind colleague has suggested that I educate myself in this area and look up the "Theory of Optimum Currency Areas" so I have, indeed, turned to that fount of all knowledge Wikipedia. I'm struck by the four conditions for a successful currency union:

• labour mobility
• openness with capital mobility with wage and price flexibility
• a centralised risk-sharing fiscal policy
• broadly symmetrical business cycles within each participating region or country.

So how does the Euro zone stack up?

Well, labour mobility is enshrined in law but there are language and cultural barriers which means that Europe looks nothing like the much more mobile US.

How about wage and price flexibility? Well, if that really existed Greek, Spanish and Irish wages would be pushed down to restore competitiveness. If that's happening then it's a slow process (and, inevitably, a painful one).

Centralised risk sharing? No. There's no central policy. The Stability and Growth Pact was widely ignored. Germany (or individual Germans, at least) are very wary of cross-subsidising southern Europe.

Symmetric business cycles? Very clearly not. Europe's core and periphery have very different economies. Right now Germany is still growing through its export-led policies; many of the southern countries are close to being basket cases.

My conclusion? I go back to my opening paragraph. The Euro was a political project which tried to ignore the clear economic problems it engendered. There either has to be closer fiscal integration or an admission of rather expensive defeat.