What is the problem with the euro currency?

The trouble with the euro all along has been that it doesn’t give countries flexibility when bad things happen. When the financial crisis hit, some countries really needed to get their costs down. Iceland, which still had its own currency, cut its wages in euros by around half more or less overnight, just by letting the krona drop. Spain had to go through five years of crippling unemployment to achieve a more modest reduction.

Now, the US is a huge economy with a single currency. But we have other means of adjustment: big federal programs that cushion the effects of local shocks, federal guarantees on the banks, and high mobility of workers out of depressed economies. Europe has none of these things.

In the jargon, Europe is not an “optimal currency area.” The euro was just premature, and has come at a heavy price.

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