Call it the curse of the single currency.
In this week's New York Times Magazine, Paul Krugman argues that the pace of recovery in Europe is being slowed because each country is tied to using the euro as a currency, but lacks the benefits of a single government.
While the human cost of the economic crisis is lower in Europe -- thanks to social welfare programs -- Krugman argues that Europe's economic crisis is deeper than America's. The culprit, he says, is none other than the euro currency.
Ireland's economy, formerly dubbed the "Celtic Tiger," is now toothless with bankruptcy looming, and Spain's once booming economy is struggling with 20 percent unemployment and deflation. As part of the euro, neither have the power to adjust the currency to deal with the crisis, he says.
This week, Otmar Issing, the chief architect of the euro warned that unless countries fell into line over fiscal policy, the currency would not survive.
"The crisis brought further evidence of a basic design flaw of monetary union, namely that we could not rely for its sound working on member countries to carry out appropriate economic policies," he wrote in an article quoted by the New York Times.
In response to debate over the future of the euro, earlier today, French Prime Minister Francois Fillon called the collapse of the European currency "unthinkable" and promised action to prevent it.
"The euro has been under attack. Europe's duty is to make sure the euro is sturdy, that there are no doubts about the euro and no speculation around the idea that one day the euro might disappear," he said in a speech in London. He added that the EU was read to do "everything, absolutely everything, to ensure the euro area's stability."
In the New York Times article, Nobel Prize-winner Krugman compares the economies of Ireland and Nevada. Both depend on exports, and both are part of currency unions, the euro and the dollar. Both saw incredible real estate booms before the crisis. Then the bubbles burst.
Unlike American states, however, European countries aren't backed by a single, shared set of government resources. Here's Krugman:
"...Retirees who moved to Nevada for the sunshine don't have to worry that the state's reduced tax take will endanger their Social Security checks or their Medicare coverage. In Ireland, by contrast, both pensions and health spending are on the cutting block.
Also, Nevada, unlike Ireland, doesn't have to worry about the cost of bank bailouts, not because the state has avoided large loan losses but because those losses, for the most part, aren't Nevada's problem. Thus Nevada accounts for a disproportionate share of the losses incurred by Fannie Mae and Freddie Mac, the government-sponsored mortgage companies -- losses that, like Social Security and Medicare payments, will be covered by Washington, not Carson City.
Charting the storied history of the European single currency, Krugman suggests its creators covered up these flaws. Here's more from Krugman:
"The architects of the euro, caught up in their project's sweep and romance, chose to ignore the mundane difficulties a shared currency would predictably encounter - to ignore warnings, which were issued right from the beginning, that Europe lacked the institutions needed to make a common currency workable. Instead, they engaged in magical thinking, acting as if the nobility of their mission transcended such concerns."
Examining recovery efforts in hard-hit Greece, Iceland and Portugal, Krugman argues that the path out of the crisis for Eurozone countries will be "an ugly process," leaving the region in depression for years.