Must-Read: Never bet on an inside straight. Never eat at a place called “Mom’s”. Never go up against a Sicilian when death is on the line. And never construct a currency union vastly larger than any conceivable optimal currency area:
Martin Wolf: More Perils for the Eurozone: “Divergence in the performance of members of the single currency is a real challenge…
The combination of weak aggregate demand with huge post-crisis divergences in economic performance has turned the eurozone into an accident waiting to happen. True, it is quite possible that the situation will stabilise. But the interactions between economic and financial events and political stresses are unpredictable and dangerous.
What the eurozone needs most is a shift away from the politics of austerity. In its most recent Economic Outlook, the OECD, a club of mostly rich nations, makes a cogent (albeit belated) plea for a combination of growth-supporting fiscal expansion with relevant structural reforms. This is most relevant to the eurozone because that is where demand has been weakest and the fetish over fiscal deficits most exaggerated. In the big eurozone economies, net public investment is near zero. This is folly.
Alas, little chance of change exists. Those who matter — the German government, above all — view public borrowing as a sin, regardless of its cost. The political and economic impact of breaking up the eurozone is so great that the single currency may well soldier on forever. But it has by now become identified with prolonged stagnation. Those member countries with the power to change this approach should ask themselves whether it really makes sense. It is time for the eurozone to stop living dangerously and start living sensibly, instead.