Greece is looking at a period of deflation; their rescue package is, likely as not, going to allow the government to lay off government workers. The end result is likely to be draconian in reach; allowing the Greek government to extend its debt payments just doesn't look possible. (For one thing, the market hates to lose money.) So the Greek economy will probably suffer a bit. There are some interesting suggestions happening: increasing competition is one of them. That would be good.
But I don't think the Euro is going to crack, for precisely the reason Mr Krugman suggests: any move away from the Euro will result in a run on a nation's banks. Its stocks would tank amid uncertainty, its debt would priced atmospherically and basically the nation would be bankrupt before the minister finished his or her speech detailing such a move. So that's not going to happen.
The basic problem with the Euro is not that it constrains national monetary policy. It's that it doesn't constrain national monetary policies enough. Imagine if Arizona could issue its own dollars... Let me try that again. Imagine if each Federal Reserve Bank could issue its own dollars; they were responsible for money supply in that region. But the New York Fed had an oversight over some aspects of those policies, but not all. So US monetary policy would be sort of coordinated, and sort of not. State Governors would, of course, have to have a say in those policies.
San Francisco would probably spend most of its life on the edge of bankruptcy. Funding entitlement obligations in Alaska, fulfilling California's often unfunded voter mandates and Hawaii's military bases would require more money than could be reasonably supplied. The states would look to San Francisco for bail out funds, San Francisco would look to the states to lend it money. (A vicious, oscillating, spiral, in other words.) Oregon and Utah could help, but how likely is that Salt Lake City voters will be eager to keep bailing California out? Dallas would be forever dealing with a foreign exchange problem; Philadelphia would be continually addressing trade imbalances, especially agricultural trade, with Kansas, St Louis and Chicago. And so on. (Even worse, states like California, would depend on the other states to bail it out when it spent too much, and didn't collect enough taxes. Ooh. That sounds awfully familiar...) There would be much clucking about how the single dollar system impedes national growth.
(An aside: That's one of the things Rep. Ron Paul would like to do; he wants each state to be responsible for its own dollars. He's notably a little vague on the monetary policy bits.)
That, roughly, is what is wrong with the Euro. Each nation controls its own fiscal policy, under an umbrella of a single currency. While each nation had its own currency, it flourished and failed according to the competence of its government. But (almost) everyone entered the EuroZone. Which resembles some sort of fiscal Twilight Zone. Now economies that were loosely linked are strangely linked. Greece has radically different social policies to Germany; Iceland's economy doesn't look like Ireland's, and so on.
Instead of thinking through the problems caused by having Alabama having the same nominal currency as Arizona, but a radically different fiscal policy (which would be required, simply because they have radically different economies), Mr Krugman concentrates on a single aspect: the fact that a single, poorly implemented, currency limits what governments can do when they get into trouble. It's not the limitations of action that are the problem in Europe: it's the shoddy implementation of the Euro!
When the Euro was introduced, I tried to figure out who was in charge of it. Turned out everyone. Which is the same as "no one". The central bank has nominal control, but it's nominal at best, and is more accurately described as "wistful". Germany can maintain its competitive edge with bond issuances. Greece can hide its books. Spain can maintain an employment system that baffles the mind. The end result is a series of national fiscal policies that, while supposedly all pointing the same direction, look more like a Jackson Pollock than anything coherent. (With apologies to Mr Pollock; has work has more coherence than European fiscal policies.)
Europe needs a single currency; Britain, arguably, doesn't, but it would help Europe if Britain did join the Euro. For one thing, Britain could bring some fiscal sense to the current nightmare. When the Europeans allowed sovereign governments so much control over their local Euro, they set the stage for something they hoped to avoid! It's in the Euro agreement that bailouts can't happen. A government spends too much, and goes bankrupt? So what? Well, it turns out to be a big deal. How astonishing.
Carolyn Ann

