Megan McArdle (and Martin Wolf) argue convincingly that the EU monetary union has about a 50% chance of staying as defined. Here are selected excerpts — you will need to read both original articles to understand the arguments:
I’ve been making the argument for a long time–at least seven years in print, and in private before that–that the eurozone looks about as stable as the Unabomber. Especially when you have a fiat currency, you need to think about what makes an optimal currency zone–the largest unit that can easily share a unit of money. The euro countries are not an optimal currency zone: their economies do not move in sync, and they are not fully integrated.
(…) In today’s Financial Times, Martin Wolf finally says what I’ve been thinking: “the eurozone, as designed, has failed.” As the PIIGS teeter on the brink of insolvency, the central banks are financing their banks–and the governments–by accepting discounted public debt as collateral. And because of the interlinkages between creditor-nation and debtor-nation banks, practically speaking, the Bundesbank is now guaranteeing all that debt. Cosigning a loan for someone with shaky credit is a very risky activity; there’s not much evidence that it works better at the international level. The picture Wolf paints is pretty dire:
(…) Debt restructuring looks inevitable. Yet it is also easy to see why it would be a nightmare, particularly if, as Mr Bini Smaghi insists, the ECB would refuse to lend against the debt of defaulting states. In the absence of ECB support, banks would collapse. Governments would surely have to freeze bank accounts and redenominate debt in a new currency. A run from the public and private debts of every other fragile country would ensue. That would drive these countries towards a similar catastrophe. The eurozone would then unravel. The alternative would be a politically explosive operation to recycle fleeing outflows via public sector inflows.
(…) Unless their economies rapidly start to mend, continuing in the euro will be economic suicide for the PIIGS once the backdoor subsidies stop. In this week’s column, Robert Samuelson notes just how dire things are “Already, unemployment is 14.1% in Greece, 14.7% in Ireland, 11.1% in Portugal and 20.7% in Spain. What are the limits of austerity? Steep spending cuts and tax increases do curb budget deficits; but they also create deep recessions, lowering tax revenues and offsetting some of the deficit improvement.” Add on top of this the drawbacks of an expensive currency and a tight monetary policy for a troubled economy, and they’d have to be crazy to stay.