Princeton economist Paul Krugman has finally disavowed his earlier position of euro-optimism. In his New York Times column
Firday, he writes that he could "see three ways Greece could stay on
the euro." Unfortunately, "none of these alternatives seem politically
plausible." As a result, the "unthinkable" may well happen, with Greece
leaving the euro, "send[ing] shock waves through Europe, possibly
triggering crises in other countries." He thinks it's still possible
this result could be avoided if "European leaders are able and willing
to act far more boldly than anything we’ve seen so far." But as of now,
the euro abandonment is "where this is heading."
Not all agree with Krugman, though. Harvard economist Greg Mankiw quibbles a bit, while a Council on Foreign Relations Fellow thinks leaving the euro is the wrong path and former IMF chief economist Simon Johnson and London School of Economics economist Peter Boone think they might see another option. The debate has extra urgency given that some are blaming yesterday's 1,000-point Dow plunge on the European and, more specifically, Greek instability.
- Wasn't the Early U.S. Kind of Like Today's E.U.? Mankiw says "a large part of [Krugman's] argument is that Europe is not an optimal currency area because it lacks a large central government enacting transfer payments among the various regions." But 19th-century U.S. had a common currency without a "large, centralized fiscal authority," too, and it "worked out fine." Two possible differences between the past U.S. and present E.U. might be the former's different labor system, which "facilitated the adjustment of wages," and "labor mobility." If the wage adjustment is the key difference, then perhaps Europe should try the wage route. If the issue is mobility, that's harder to change: "Greeks have to stay in Greece because they don't speak German." In that case, "Paul may well be right that the Euro experiment is over."
- No, Actually Edward Harrison at Credit Writedowns highlights, as does The Economist's Ryan Avent, the importance of language and cultural differences rendering European country borders a bit thicker than the borders between American states. In other words, they think mobility is a significant difference here.
- Greece Ditching the Euro Just Makes Things Worse, argues Marc Levinson at the Council on Foreign Relations. "Adopting its own currency in place of the euro would not spare Greeks the pain of adjustment," while "keeping Greece within the eurozone is in the interest of other European countries, too, for reasons of politics as much as economics. The aspiration to be part of the European Union and the eurozone has been an extraordinarily important force in southern and eastern Europe." But Greece leaving would lead these other countries to "conclude they have no hope of joining."
- One 'Narrow Escape Path' There remains another possibility, argue Simon Johnson and Peter Boone on a New York Times blog. European leaders could "talk down the euro," causing bond yields to "rise on the euro zone periphery." There would be "episodes of panic." Then, declare European Central bank support of the euro at the lowered levels and support the "peripheral euro zone nations viewed as solvent by buying their bonds." Only once this is completed, European leaders would have to " push weaker governments to restructure," after which "European banks should be recapitalized as necessary and have most of their management replaced." Their reasoning here: "This is a massive failure of euro groupthink--including most notably at the political level--but there is no question that bank executives have not behaved responsibly in a long while and should be replaced en masse."