This week, Europe's leaders will convene in Brussels to debate the future of the common currency. Five eminent economists -- Barry Eichengreen, Hans-Werner Sinn, Martin Feldstein Pedro Solbes and Steve H. Hanke -- weigh in on where the euro goes from here, The Wall Street Journal reported in a compendium.
Fix the Banks, Fix the Currency
By Barry Eichengreen
For the euro to grow into a happy and healthy adult, many things must happen. Most importantly, Europe needs to fix its banking system. Many European banks, starting with Germany's, are dangerously over-leveraged, undercapitalized, and exposed to Greek, Irish and Portuguese debt. Rigorous stress tests followed by capital injections are the most important step that governments can take to secure the euro's place.
Survival Isn't Guaranteed
By Hans-Werner Sinn
In my opinion the euro should survive. Though its members are too many and too disparate, the monetary union must be maintained, largely with its current number of states, for the benefit of political stability. The euro also offers measurable economic benefits, among them substantial reductions in transaction costs and exchange risks, which are prerequisites for exploiting the benefits of free trade.
Whether the euro will survive is another matter. This very much depends on whether European countries implement political and private debt constraints that effectively limit capital flows. The trade imbalances from which the euro zone is currently suffering have resulted from excessive capital flows brought about by interest-rate convergence and the apparent elimination of investment risks after the currency conversion was announced some 15 years ago.
Still an Economic Mistake
By Martin Feldstein
I continue to believe that the creation of the euro was an economic mistake. It was clear from the start that imposing a single monetary policy and a fixed exchange rate on a heterogeneous group of countries would cause higher unemployment and persistent trade imbalances. In addition, the combination of a single currency and independent national budgets inevitably produced the massive fiscal deficits that occurred in Greece and other countries. And the sharp drop in interest rates in several countries when the euro was launched caused the excessive private and public borrowing that eventually created the current banking and sovereign-debt crises in Spain, Ireland and elsewhere.
But history cannot be reversed. Despite these problems, the euro will continue to exist for the foreseeable future. It will continue even though that will require large fiscal transfers from Germany and other core nations to those euro-zone countries with large debts and chronic trade deficits.
A Decade of Success
By Pedro Solbes
After 10 years with the euro, the economic crisis and its consequences in some countries of the euro zone have reopened the debate about the suitability of a single currency in the absence of a high level of political integration.
But the euro has been a great joint success, which has allowed for a long period of growth and price stability in Europe. It has had a different impact in each country, but its benefits have been seen across the board. The euro has permitted more coordinated action in Europe and has prevented competitive devaluations. This has been key not only for the euro zone, but also for the rest of Europe and even for the global economy. Without the euro, we would have witnessed an increase in protectionism, which would in turn have aggravated the impact of the crisis in Europe and elsewhere.
A Political Currency
By Steve H. Hanke
A grand European project has percolated since Napoleon. After World War I, the project took on some ideological color. In the name of Continental peace, the containment of Germany via a "union" was deemed to be desirable, particularly by French governments. The staging of the euro during the last decade-and-a-half and the playbills presenting the dramatis personae—such as former French President François Mitterrand—signal that the agenda is as robust as ever. The modalities are familiar: the French will provide the direction and the Germans will foot the bill. Read more. (Subscription required.)
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