Wall Street Journal
January 6, 2011
New year, same old challenges. The past few months have seen the debate on European government debt mutate into calls for a breakup of the euro zone. Many of the suggestions border on the surreal: Let's reintroduce the German mark or at least kick out Greece, Ireland and maybe even Portugal and Spain. Or how about a northern and a southern euro?
Fantasizing about the demise of the euro may garner applause in talk shows, but it is certainly not in the union's interest, nor indeed in Germany's. Germany benefits from political and economic integration in Europe, which is driven and symbolized by the euro. The disintegration of the single currency is not a solution. Governments are wisely focusing on better policies instead.
First of all, the "crisis-ridden countries" have embarked on budget consolidation and economic-reform programs that need to be continued. It is not about axing spending in a blind rage, but rather about reforms in areas such as welfare spending and the labor market, using tools like privatization or moves to boost public-sector efficiency.
Claims that these policies will hurt domestic demand and economic growth contradict historical experience and the economic mechanisms of a market economy. Numerous countries have in the past swiftly returned to strong growth in the aftermath of consolidation efforts, often without substantial currency devaluation. One example is Ireland in the late 1980s, another Belgium in the mid-1990s or Canada in the late 1990s.
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