When the euro zone was launched with great fanfare, such vocal critics as famed U.S. monetarist Milton Friedman voiced many of these concerns. How, they wondered, could a single currency possibly work, when all the governments maintained their own separate fiscal policies and when there were such huge economic disparities between the wealthier power centres and the small, weaker countries on the periphery?
But the idea of the euro was compelling for economic, political and investment reasons. The single currency would be the cornerstone of a vast, new common market of 500 million consumers, giving it enough clout to compete with the United States. Foreign investors, from Canadian pension funds keen on infrastructure plays to Japanese car makers, would find the market irresistible.
Integrated economies would be less likely to invade one another, for the simple reason that it makes no sense to start a war in a country that buys your products and services. The currency, coupled with the reduction of tariffs and other trade barriers, would stimulate pan-European competition, giving poor countries like Greece and Portugal the opportunity to modernize their economies and raise their standards of living.
Much of this dream scenario became reality. But much did not. The euro raised costs and inflation rates in many of the small countries, making them less competitive against powerhouses like Germany and France. Fiscal discipline was largely absent in these same countries, pushing deficits into dangerous territory.
As long as growth was strong, governments could ignore these faults. Thanks to a long period of benign economic and financial conditions, a strong dose of fiscal discipline swallowed by most of the member nations and the cost-cutting benefits of globalization, the euro soon won entrance into the exclusive club of the world's most-trusted currencies.
Then the financial crisis and recession came and the downside of the euro suddenly became apparent. Costs were wildly out of control and devaluations could not come to the rescue. The boom turned into a bust virtually overnight. The financial monster created by the subprime mortgage market in the United States had stomped over to Europe and ultimately clamped the euro zone in its jaws.
RBC's Mr. Jones won't go so far as to predict the end of the euro. But others will. One is Nouriel Roubini, "Doctor Doom" himself, the New York University professor who predicted the 2008 financial crisis. "The euro zone could drift essentially with bifurcation, with a strong centre and a weaker periphery and eventually some countries might exit the monetary union," he said in a recent Bloomberg Radio interview.
Another skeptic is Paul Krugman, Nobel laureate economist and New York Times columnist. He has predicted years of pain ahead as the common currency drags down uncompetitive countries.
Even those who believe the euro's demise is unthinkable and unwise agree that the currency faces a rough ride unless the member countries even out their economies and become more transparent about their financial health.
Germany, Europe's export machine, would have to raise domestic consumption; the PIGS would have to spend less. Labour costs and flexibility would have to converge. Policing of national accounts would have to become tougher to prevent countries from fudging their deficit figures, as Greece did for years. Some sort of standby bailout package would have to be put in place to rescue the countries hit hardest by a financial crisis.
The worst may - just may - be over for Greece, whose spending clampdown was applauded this week by the European Central Bank. On Thursday, the day after the cutbacks, which included pension freezes and cuts to bonuses for civil servants, were announced, Greece saw strong demand for its €5-billion bond issue (though the debt had to offer a hefty 6.25-per-cent interest rate to attract buyers).
Jean-Claude Trichet, the central bank's president, was quick to praise the handling of the Greek crisis as a demonstration of the success of the euro zone, not the opposite. Some economists were equally quick to disagree. The euro zone "still needs to demonstrate that it can enforce fiscal discipline while generating strong and sustainable growth," said Marco Annunziata, economist in London with Italy's UniCredit bank.
Spain showed no fiscal discipline and is in grave danger of showing no strong and sustainable growth. Its progress, or lack thereof, is being watched closely by Brussels, central bankers and investors. Spain's economy is at least five times bigger than Greece's. If Greece implodes and pulls out of, or gets turfed from, the euro, the EU and the common currency might just survive. If Spain goes under, all bets are off.