Don’t kill the euro

Bond markets have scorned the €85 billion ($113 billion) bail-out offered to Ireland on November 28th. Yields have risen not just for Ireland but for Portugal, Spain, Italy and even Belgium. The euro has fallen—again. As one botched rescue follows another, solemn vows from European Union leaders that a break-up of the single currency is unthinkable and impossible have lost their power to convince. And that is leading many to question whether the euro can survive.

The case against it is that European citizens can no longer live under its yoke. In Europe’s periphery some are yearning to be spared the years of grinding austerity that may be needed for wages and prices to become competitive. In the German-dominated core they are fed up with paying for other countries’ fecklessness and they fear that, as creditors, they will suffer if the European Central Bank (ECB) inflates away the laggards’ debts. Deep down lurks the sullen suspicion that this is a drama that the euro zone may be condemned to relive time and again. So why not get out now?

Financial history is littered with events that turned from the unthinkable to the inevitable with breathtaking speed: Britain left the gold standard in 1931, Argentina abandoned its dollar peg in January 2002. But a collapse of the euro would bring with it unprecedented technical, economic and political costs (see article).

A break-up might happen in one of two ways. One or more weak members (Greece, Ireland, Portugal, perhaps Spain) might leave, presumably to devalue their new currency. Or a fed-up Germany, possibly joined by the Netherlands and Austria, could decide to junk the euro and restore the D-mark, which would then appreciate. Read full article in The Economist...