The Euro: and its threat to the future of Europe
JOSEPH E. STIGLITZ

The problem with the euro, and the collective of nations belonging to the “common currency” arrangements known as “the eurozone”, is that, from its inception in 1999, it lacked the network of institutions and appropriate policies that enable a common currency to work efficiently, as in the United States.

Europe is not what economists call “an optimal currency area”. Countries with widely differing inflation rates and monetary policy needs voluntarily locked themselves together in a fixed exchange rate system with one key policy interest rate throughout the zone. Countries like Italy would no longer be able to devalue their currencies to maintain their trading competitiveness with low inflation nations such as Germany. And as for interest rates, which central banks try to adjust to suit the various phases of the business cycle or the state of consumer demand in the economy, the vogue phrase became “one size fits all”.

Unfortunately, as the troubles of Ireland, Spain and Greece have shown, one size does not fit all. There have been chronic problems, with economic growth well below potential in many countries, unemployment far too high, and all sorts of banking concerns and worries about both personal  and national indebtedness.