The Euro Crisis: Where to from Here?

It is useful to begin a discussion of the euro crisis by facing up to the problems inherent in monetary union. One possible view is that the inherent difficulties were so great that the euro was doomed to fail. But even if one takes the historic fact of European monetary union as given, a consideration of how it could have been pursued differently should precede a discussion of ideas for how to fix the flaws that have become evident in the crisis. Three distinct sets of difficulties were structurally built into the monetary union from the beginning. Going forward, leaders have to deal with all three, one way or another:The asymmetry problem, arising from the inability of members to devalue; The fiscal problem, in particular the moral hazard from keeping fiscal policy primarily at the national level when monetary policy was moved to the euro-wide level; and the banking problem, similarly keeping banking supervision at the national level while moving monetary policy to the euro level.