Wall Street Journal
August 26, 2010
Critics of the euro zone have long claimed that it suffers from structural flaws that threaten its long-term survival. The Greek sovereign-debt crisis has done much to vindicate these misgivings. It is now obvious that comprehensive reforms are essential if the euro is to survive. So far, most attention has focused on the need to tighten policy coordination among euro countries. But just as important is that euro-zone members embrace, rather than resist, the need to free up their economies. So long as euro nations remain ambivalent about liberalization, the euro will rest on weak foundations.
Before the euro was launched, economists liked to debate whether Europe was, or would ever be, an "optimum currency area"—that is, a region in which the benefits of sharing a currency would outweigh the disadvantages. Few believed the euro zone was such an area in 1999, but optimists thought it stood a good chance of becoming one in time. For it to do so, at least two things had to happen. First, economic integration had to increase: The euro zone had to be underpinned by a single market in which goods, services, capital, and people moved freely across borders. Second, national labor markets had to become more flexible in order to compensate for the loss of the exchange rate as an instrument of adjustment.
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