Bloomberg
Editorial
May 11, 2012
Europe’s chaotic political landscape is doing an excellent job of exposing a fundamental flaw in the euro area: the lack of a mechanism to revive growth in hard-hit economies.
Recent elections in Greece, France and Italy, where anti- austerity candidates made major gains, have demonstrated the failure of policies that seek to solve the euro area’s debt problems through spending cuts and tax increases alone. Economic strife has brought Greece to the brink of a political breakdown and exit from the euro -- a move that could trigger contagion throughout the currency area and have dire repercussions for the entire European project.
Economists have long warned that the euro area would be prone to such disasters. The member states’ economies are too out of sync to be considered an “optimum currency area.” Prices, wages and the flow of people across borders are not dynamic enough, a shortcoming that can be fatal unless the currency union has a powerful shock absorber. In the currency area known as the U.S., for example, federal transfers such as income-tax credits help struggling states catch up, cushioning as much as 40 percent of the blow of economic downturns.
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