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The Euro Problem

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One of the important points made by Krugman in his analysis of the French election and its potential effects:

One answer — an answer that makes more sense than almost anyone in Europe is willing to admit — would be to break up the euro, Europe’s common currency. Europe wouldn’t be in this fix if Greece still had its drachma, Spain its peseta, Ireland its punt, and so on, because Greece and Spain would have what they now lack: a quick way to restore cost-competitiveness and boost exports, namely devaluation.

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Yet breaking up the euro would be highly disruptive, and would also represent a huge defeat for the “European project,” the long-run effort to promote peace and democracy through closer integration. Is there another way? Yes, there is — and the Germans have shown how that way can work. Unfortunately, they don’t understand the lessons of their own experience.

Currency union without comparable political integration was a terrible idea in theory that has worked out really badly in practice. But whether this means that getting rid of the euro now would be a good idea is a different question. I’m not too worried about the effects of dismantling the euro in terms of peace and democracy promotion — but the potentially disruptive effects seem real and important. It’s a difficult question.

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