Just like the premature announcement of Mark Twain's passing into the hereafter, breathless predictions of the Euro's death are greatly exaggerated. In sharp contrast to this swirling maelstrom of half-truths, targeted innuendos and outright bull**, this well-reasoned and comprehensive analysis of the situation by Paul Krugman stands out and is well worth reading.
I do disagree with a few of Mr. Krugman's points, however.
- Like nearly every non-European, he perceives the euro mostly in technical/monetarist terms, instead of historical/socio-economic ones. It's like saying the U.S. Declaration of Independence was put together by a bunch of frustrated colonists solely for the purpose of avoiding King George's high taxes. He's definitely not alone in grossly underestimating the will of Europeans to integrate their separate nations into a cohesive peaceful Europe, but as a Nobel laureate maybe he should know better.
- He mentions American economist Irving Fisher from almost 80 years ago, who claimed that economic crises deepen when incomes fall but debt remains unchanged. That was and remains true in theory, but in the case of the eurozone today's secondary bond markets can be adapted as debt reduction mechanisms. For example, with Greek government bonds trading at 50 or 60 cents on the euro, a pan-European entity (e.g. the ECB) can quickly step in, scoop them up and refinance the purchased amounts at cost. This is now being seriously considered by European leaders (but you heard it here first, eh?).
- He draws a parallel with Argentina's default and the peso's 1-to-1 peg to the U.S. dollar. Crucially, however, the euro is not a peg but a national and international reserve currency. No matter how "hard" and "irrevocable", Argentina's peg involved pesos, a national currency that was vulnerable to psychological pressure and loss of confidence. Furthermore, unlike the eurozone, Argentina's economy was not at all integrated with that of the U.S. For example, trade between Argentina and U.S. in 2007 (exports plus imports) amounted to a mere 9.6% of Argentina's total foreign trade. Compare this to Greece, where 56% of its total foreign trade is with other EU nations.
My take on the "European Crisis" is that it amounts to more than a storm in a teacup, but much less than a perfect storm capable of sinking the euro or the EU itself. It is United Europe's first real test, a challenge from which it will come through stronger and more confident.
Despite the currently deafening cacophony of opportunistic sycophants, Europeans will soon start doing a bit of their own yelling: "Hell No, We Won't Go" (..quietly to the dustbin of history).