The Biggest Myth About The Euro

You hear it all the time. "They created a monetary union without a fiscal union." What complete nonsense that is. There is absolutely no need for a fiscal union in the Eurozone.

Those who push this notion: 1) completely ignore the US experience where, at least at the national level, there is a monetary union and fiscal union and, nonetheless, sovereign US debt is spiraling out of control; 2) if there was a "fiscal union," things would be far worse due to logrolling and moral hazard problems.

What is missing in the Eurozone is that those who owe money should sit down with their creditors and work out a repayment schedule that involves a substantial foregiveness of principal -- a partial (or perhaps nearly complete) default. Each country is and should be on its own.

If country A is profligate and spends money it doesn't have and if someone is foolish enough to lend them the money to do that, then why should country B be involved at all. Country B may have lived within its means and has no reason to bail out country A.

Markets will learn if country A defaults. Lenders will demand better behavior by country A and they will get it. It is the only way that country A will ever enact serious reforms. Country A will never bind itself to a serious austerity program for the sake of their creditors. It just will not happen, regardless of what Merkel-Sarcozy think.

The Eurozone is a great idea and should be preserved. A single currency union eliminates many of the bottlenecks of trade and finance and enhances economic growth. In the case of the Euro since 1997, lenders have blinded themselves to the differences between the credit-worthiness of the various countries that make up the Eurozone. Not any more. Thanks goodness. It is high time lenders woke up.

The very idea that somehow there is some political solution to this (using a bazooka to quote Hank Paulson) is ridiculous. The "print Euros" solution will destroy the European union as well as the Eurozone. Much simpler is to preserve the Euro and begin the process of writing down European sovereign debt -- country by country. Creditors deserve their fate in this one.

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