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.
However, the remarkable success of the euro since its launch more than a decade ago had been convincing me that I and other euro-currency skeptics had exaggerated the importance of these missing ingredients in the EMU. The euro has become of the most important international currencies. After falling sharply for a couple of years from its initial launch rate of close to $1.2 per euro to just about $0.80 per euro, it bounced back to reach over $1.5 dollars per euro. The euro is still above its initial exchange rate, with a current exchange value versus the dollar of about $1.35. In the past few years, considerable speculation developed that the euro might well supplant the dollar as the number one currency for international contracts and for assets held internationally.
These rosy euro forecasts have ended, at least for a while. Not only Greece, but also Portugal, Spain, Italy, and Ireland are in financial trouble with their international creditors, although Greece appears to be in the most immediate difficulties. They may all get out of these troubles without defaulting on their debt, but similar challenges are likely to arise in the future unless major changes are made in the architecture of the EMU. Either much more power over taxation and government spending has to be taken away from the individual member countries and given to the central authorities of the European Union in Brussels, or much more effective measures need to be introduced that would prevent government spending of different countries from greatly exceeding their tax receipts.
Since most countries within the monetary union are probably more willing to leave the union than give up sovereignty over their spending and taxation, the centralization of taxation and spending authority seems unlikely. Perhaps a system of fines and other punishments to weak-willed countries will be sufficiently strong to deter future transgressions, but that seems unlikely.
There is no simple way out of this dilemma, which is why Germany, after much initial reluctance, is warming to the idea of calling on the IMF to help Greece. One plan being discussed is for the eurozone countries to provide the funding used by the IMF. Since much of the IMF financing comes from the US, eurozone financing would avoid the EMU appearing to ask the US for assistance. Although the European Central Bank opposes this indirect route of helping Greece, the hope is that the IMF is more capable than the EMU of imposing stringent restrictions on Greece’s spending and taxation.
Some commentators have drawn analogies between the fiscal difficulties of the United States and Greece and other weak members of the EMU. As Posner shows, the US and Greece have many similarities in terms of fiscal deficits and the rate of annual turnover of its government debt. However, one crucial difference is that the US has a much more robust economy, and greater growth prospects.
The other absolutely essential difference is that the US debt is denominated in dollars, a currency that it controls, while none of the EMU countries can issue more Euros. If push came to shove, the US could consider meeting its obligations to creditors by issuing additional dollars, and partly inflating away its international debt burden. Inflation is a potential weapon for the US Treasury, almost regardless of whether its debt is in the hands of Americans or foreigners, although both groups would protest against seeing the real value of their assets greatly reduced by inflation. Greece can probably force domestic holders of its government debt to take severe haircuts, but aside from bankruptcy, it is much more impotent than the US against international creditors.
Perhaps, as Posner suggests, Greece and possibly also the other fiscally weak members of the EMU should be allowed to declare bankruptcy, although this is not without serious consequences for the future of the EMU. Still, the monetary union might well be stronger in the long run if its weaker members were forced out, or were forced into more responsible behavior by having to bear the consequences of irresponsible actions.