Charles Calomiris

Exiting the Euro Crisis

What do economics and history have to tell us about the ways euro zone countries are likely to resolve their problems of fiscal unsustainability and banking system insolvency? In answering that question, I am among the most pessimistic observers of the likely future of the euro and its membership. In my view, the euro zone’s likely failure to avoid at least some departures, if not total collapse, reflects its poor initial institutional design. Countries were joined together that were unlikely to be able to survive as a common currency zone, and there were no credible institutions in place to enforce long-term fiscal discipline or to coordinate the resolution of exigencies.

Why doesn’t everyone share my view? I think their relative optimism can be traced to differences in worldview. My worldview is that of a non-European economist and historian. Here is why that worldview leads to pessimism.

Arithmetic Trumps Legalism

As an economist, I place more stock in arithmetic than in the legalities of what countries supposedly are or are not permitted to do; legislation or politicians’ pronouncements about the impossibility of a departure from the euro zone counts for little if the math ultimately requires it. I will argue that in the case of at least one country—Greece—the fiscal arithmetic strongly favors not only a sovereign debt restructuring but also a departure from the euro zone, and there may be others for whom this same outcome will soon become a necessity as well.

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