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Why the Euro Is Failing

Ramesh Ponnuru is a Bloomberg View columnist. He is a senior editor of National Review and the author of “The Party of Death: The Democrats, the Media, the Courts, and the Disregard for Human Life.”
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Greece's government seems determined to incur the world's blame for the emergent economic turmoil in Europe. Mark Gilbert summed it up accurately for Bloomberg View: "The nation's stubborn contradictory stance -- yes to the euro, no to the conditions of continued membership -- isn't consistent with the euro's future well-being."

But it isn't just the Greeks who have incompatible goals in this affair. Leaders of the other countries in the euro area have contradictory desires as well, and their failure to choose among them has contributed to the mess.

Germany, especially, wants to minimize inflation, bailouts and the risk of an exodus from the currency union. These three goals are in great tension with one another. If they can be reconciled at all, it would require a degree of fiscal centralization that looks politically impossible.

The euro was always intended as a political project at least as much as an economic one. It was a step toward the unification of European nations more than a way of reducing transaction costs between them. Some prominent economists, such as Milton Friedman, warned against adopting it. Over the past few years, its inherent flaws have become painfully manifest. But European leaders have been willing to impose immense economic pain to keep it going.

Friedman's core argument was that the euro would impose a common monetary policy on economies that required different ones. So it has proven. During the boom years a decade ago, Greece and other countries on Europe's periphery over-borrowed because interest rates were inappropriately low for them. During the bust, the European Central Bank's efforts to keep inflation low in the core has led to a punishing deflation in the periphery. The ECB raised interest rates in 2008 and 2011 -- at both the start and the middle of Greece's depressions.

It could have been predicted, and was, that the euro would suit Greece badly. And Greece has no one to blame but itself for freely signing up. But it's also true that the ECB has conducted monetary policy more for Germany's convenience than for the euro area as a whole.

Greece has long needed its wages and prices to fall relative to other European countries. With an independent drachma, the necessary adjustment would have taken place in foreign-exchange markets. Even within the euro, a looser monetary policy would have enabled the relative shift in the form of higher prices in the core countries.

Instead, Europe has followed a course that entailed much more pain for the periphery. Debt relief and fiscal transfers would soften that pain, but naturally core-country creditors and taxpayers are resistant to such policies -- and seek to place conditions on them that the basket-case countries can't easily accept.

Remember: The euro was adopted to advance political unity in Europe. It is instead causing deepening rancor (as Friedman also predicted). Judged either on economics or politics, the euro experiment is failing.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Ramesh Ponnuru at rponnuru@bloomberg.net

To contact the editor on this story:
Timothy Lavin at tlavin1@bloomberg.net