Three years on, debate still rages over what is to blame for the euro crisis and what to do about it. Meanwhile, large parts of the zone are in a deep recession and the talents of a generation of young people are being wasted.
In looking at what went wrong, some point to the profligacy of borrowers while others stress the design flaws in the system. Yet others pin the blame on how the crisis has been managed. There are still others who think that the eurozone is a victim of a credit crunch that began in the United States.
There is some truth in all these explanations. While the credit crunch did trigger the crisis, it exposed a host of problems that had been masked by a decade of easy growth. Peripheral countries had grown uncompetitive as a result of rising wages. Often there was corruption and excessive debt, while anti-competitive practices that suited vested interests kept productivity low. Almost everywhere, governments ran unsustainably generous welfare states.
The crisis has also been managed appallingly. The zone took two years to let Greece restructure its debts. In the meantime, the French, German and other banks which had financed Athens’ profligacy were able to get much of their money out of the country. If the banks had been hit early, their governments would have had to bail them out. The discussion would then have been as much about foolish lenders as about lazy borrowers.
Among the other mistakes was the failure to clean up the zone’s zombie banks and the fact that both fiscal and monetary policy were too tight. But troubled countries have also taken too long to root out vested interests and restore competitiveness.
Meanwhile, the two most popular solutions to the crisis aren’t really solutions at all. Euro sceptics want to break up the single currency. While the euro should not have been created when it was, the transitional economic and political costs of abandoning it would be massive.
Euro enthusiasts, by contrast, pin their hopes on a full fiscal and political union to complement the monetary union. This is pie in the sky. Neither national politicians nor the people are willing to see much more power centralised in Brussels. There is good reason for this too: the European Union is remote and only loosely accountable.
So what’s the way forward? The answer is a muddle-through consisting of small doses of looser monetary and fiscal