The Euro Crisis: Democracy v Economic Efficiency?

From the Economist, Buttonwood's Notebook:

THE future of Europe; what lies ahead for its southern countries? That was the theme of a debate which your blogger chaired last night in front of an audience of graduates from Luiss, the Italian university, in London.

The speakers were Brendan Simms of Cambridge University (author of an excellent book "The Struggle for Supremacy in Europe", reviewed here), Paul de Grauwe of the LSE (author of a highly insightful paper on the euro zone's fragility back in 2011), Martin Wolf, the FT columnist and Marcello Messori of Luiss itself.

Mr Wolf was on scintillating form, arguing that the euro zone had been a mistake from the start, for the well-known reasons that a currency union requires fiscal and political union as well. The euro was favoured, particularly by the French, as a way of constraining the power of the deutsche mark; 25 years of managing exchange rates (the EMS, ERM et al) had seen repeated humiliations for France, as governments were forced to choose between tightening monetary policy and embarrassing devaluations. But adopting the euro only made matters worse, especially as Germany was determined to follow its post-war policy of aiming for a strong manufacturing sector and a trade surplus. Without the escape route of devaluation, the other EU countries were held hostage to German economic policy.

Imbalances eventually built up within the system and were then exposed in the 2007-2008 crisis; the response from the authorities has been inadequate, to put it mildly. The ECB is failing to meet its target on inflation or money supply growth; the OMT (Mr Draghi's plan to do "whatever it takes" to save the euro) might have fooled the markets, but would fail if ever put into practice. In short, the current system is neither fish nor fowl and guarantees stagnation; either the countries must push forward to complete union (which he thought unlikely) or it will break up....MORE