In Summary
The economic arguments for and against the euro are getting closer every day for all countries, but still appear to be marginally in favor of retention. The political arguments, in my opinion, remain strongly in favor of the euro. Given the history of the continent, there is a strong bias in favor of constraining Germany with political and economic structures. Furthermore, the euro itself was created as a response to the failure of exactly the competitive devaluation strategies that are now presented as the alternative to the euro.
The political analysis has to extend beyond the country-to-country level, however, to fully evaluate what will happen. We need to look at two particular factors within each of the countries. The first is the regions. As I mentioned in an earlier post, the regions in many European countries act as semiautonomous entities, making governance more complicated. This becomes relevant when the economic and political incentives of the regions differ from those of the country as a whole. Let’s take Spain as an example: from a Catalonian point of view, if the central Spanish government were to fail, regional autonomy would be enhanced. With differing incentives inside a country, it becomes much more complicated to decide whether and how to make the sacrifices required to remain in the eurozone.
The second internal factor to consider is the preference of the electorate. While the elites in almost all the A-list euro countries are deeply committed to the euro’s survival, the commitment of the average voter cannot be taken for granted. Europe looks much more vulnerable politically if a deal cannot be stitched up at the national level and presented to the electorates as a fait accompli. Germany is the best example of this: public support for the euro and for the sacrifices German taxpayers need to make to support it are eroding daily. Although Greek reactions to the imposed austerity are the best known, having been on the news many times, Greece is not the only one having grassroots troubles.
Overall, the benefits still seem to outweigh the costs for a majority of the countries involved, including the largest and most important ones. This drives my conclusion that, for the moment, the euro is more likely to stand than to fall. The balance is changing literally by the day, though, and has been shifting perceptibly against the survival of the euro in the past couple of weeks. My conclusion is not 90–10 odds, unfortunately, but more 55–45 that the euro will remain. Given that close a balance, I may well change my mind about the probable end result in the near future. I will certainly update my thoughts on the blog, within the context outlined in this post.
I sincerely hope, though, that the euro does survive. The economic argument was always flawed, and the founders knew that going in. The political and historical arguments, however, have always been rock solid; as such, a breakdown of the euro could result in political damage that is difficult to overestimate. It is quite certain in my mind that if the eurozone does break up, the economic damage, however extensive and deep, will only be—in the end—a small part of the total damage done.