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Four illegal ways to sort out the Euro finance crisis

And one of them is about to be used

Comment Saving the euro isn't the easiest of things: solving the current problems actually would be quite easy, if expensive, except for all the laws and regulations that rule out all of the easy ways.

The basic problem is well explained here. Don't worry too much about what the Taylor Rule is: just accept that if you're going to have a well-functioning currency across an area then the interest rate derived from the Rule should be the same for all the parts of that area.

And Europe, the eurozone, simply fails this test. Interest rates were about right in the boom and are about right now for the eurozone as a whole. But they were waaaaay too low for the periphery (most especially Ireland and Spain) in the boom, and they're similarly way too high for Portugal, Spain, Greece and Ireland now. They're just fine and toasty for France and Germany though: which is the very problem that the currency area faces. Because the different areas are so out of whack, partly for structural reasons, partly because they're on different cycles of boom and bust, the necessarily single interest rate associated with a single currency just won't be right for some areas all of the time.

In the jargon, the question is: "is the eurozone an optimal currency area?" And this result from looking at the Taylor Rule (which is by no means the only such test that gives a negative result) tells us that the answer is "No". Thus the current eurozone should not be the current eurozone; many of the countries that are in it should not be in it.

Which brings us to our first possible solution for the current woes. Break up the euro. This is simple and would be a good economic solution in the medium to longer term. However, it would also be an entire nightmare in the short term and, yes, you've guessed it, would be illegal. For, as we know, the whole point about the European Union itself is "ever closer union" and so everything has been set up to make it easy enough to join the euro, but you're not actually allowed to leave once in.

That "not allowed" may well get severely tested before this is all over, but currently there is no legal mechanism for anyone to leave.

At the other end of the spectrum we could work on making the eurozone an optimal currency area. This would involve much closer economic union. No, not just more economic power going to the EU and up from the nation states. It would need substantial subsidy from the richer areas to the poorer. Yes, I know we all moan about how much we already pay but current spending is a rounding error compared to what would be needed. We'd be talking about the sort of sums that the south east of England sends to the north east, the sums that west Germany has been sending to the east: several percentage points of GDP. Germany is still, 20 years on, sending 2 per cent of GDP to the east. To really sort out Spain (and, possibly, Italy) we'd be talking about 3 to 5 per cent of the northern European economies being collected in taxes and sent south.

Leave aside the political difficulties of this: this again would be illegal as the current rules stand, both at the EU level and almost certainly in the German constitution as well.


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