The Becker-Posner Blog
March 21, 2010
The short answer is “yes”. Yet possibly much more serious challenges to the euro will arise in the future unless some important changes are made in the European Monetary Union (EMU).
When the euro was launched on January 1, 1999, I was skeptical about its long run viability primarily for two reasons. The members of the EMU maintain their ability to follow different government spending and taxing policies, and their economies are subject to specific shocks because they produce different products and services, and have varying levels of per capita incomes and wealth. Since no country has the power to print Euros, no country can offset these country-specific difficulties by devaluating their currencies relative to the currencies of other members of the EMU, or even by devaluing relative to countries outside the monetary union. Devaluation under these circumstances reduces the net import of capital by a devaluing country, and hence eases its foreign debt. In the past, countries like Italy or Greece that had, among other troubles, insufficient taxes relative to government spending, frequently devalued their own currencies (the lira and drachma, respectively). When the debt was issued in local currencies, devaluation also in effect “inflated away” some of the real value of any foreign debt.
A partial alternative to devaluation when a country is in economic trouble is for many of its workers to move to other countries where jobs are more plentiful and wages are higher. Such migration helps soak up the unemployment and reduces the scarcity of jobs caused by the economic difficulties. This is essentially what happens in the US, a common-currency union of 50 states. States that do poorly relative to other states experience outmigration of many of their younger workers. Yet migration is still quite limited within the EU, despite the progress that has been made.
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