There's Really No Way Out on Euro: Fix It Or Nix It

The Wall Street Journal 

By DAVID COTTLE

The euro, as we know, is a curious edifice, built without exits.

Perhaps it was noble commitment to the unifying ideal, perhaps hubris of an order to rival Ozymandias, but, either way, its founders decreed the currency to be forever. Retreat was not an option.

But it is just as likely those founders were concerned that evil, "Anglo Saxon" speculators would delight in forcing weaker countries through any built-in out-door. The greedy scallywags did just that, of course, in the case of the Exchange Rate Mechanism, the euro's predecessor and departure lounge. A hapless British government was forced to take sterling out of the building back in 1992, a contingency neither side of the deal regrets now, but a big problem at the time.

And so, today, with the travails of Greece and Italy in stark illumination, the position remains the same. There's no exit.

In recent days the leaders of Germany and France have assured us that even tottering Greece remains a vital member of the bloc; its departure not even to be discussed.

The seismic upheavals of a single euro-zone deserter, never mind a more complete break-up, are simply too awful to contemplate, or so the received wisdom runs.

Well, no one is saying that such things would be pleasant or easy. But let us also remind ourselves precisely what those who insist on the integrity of the euro zone are arguing for: Nothing less than the maintenance of a clearly suboptimal and, now, dangerous currency zone right at the core of the world's economy. The world's economy might have something to say about that even at the best of times—which these clearly are not.

Some might argue, of course, that all currency zones are suboptimal, and cite even the dear old greenback while they did. Rural Alabama, for example, doesn't really require the same base rate as the Hamptons. Well, no, but people in the Hamptons can fiscally support their rural compatriots in Alabama without breaking the economic rules that the U.S. lives by. Europe can't do the same, even if the citizens of more successful member states were content to support laggards over their borders. Increasingly, they're not.

And look at just how suboptimal the euro zone has been. Research from BNP Paribas late last year concluded that before 2007 Spain and Ireland had never had base rates from the European Central Bank within five whole percentage points of where they needed them to be.

But let's be charitable and assume that the euro zone's leaders achieve what, on face value, they seek to do and stabilize their zone, disparities and all. Even in that happy event the euro is still a project whose bluff has been called.

Supposedly a rampart in whose mighty lee the weaker economies of Europe would be protected and given time to emulate the strong, it has actually been a smokescreen behind which economic divergences have sharpened. Only, now they're everyone's problem.

And that could be another reason why those who want the euro to survive in its present form run into difficulties. It is fair to say that the international community looked at the project with a degree of skepticism when it was gestating, which then turned to grudging admiration, perhaps even a little awe, when the thing took off as planned and euro notes circulated seamlessly among the member states.

Now things are different. The zone's endless travails have long ceased to be either a little local difficulty or the object of a bit of schadenfreude on the part of the world's Treasuries. They've become a source of grave systemic risk at a time when the world really doesn't need another one.

So the big guns are firing.

Lawrence Summers, an ex-U.S. Treasury secretary gained wide publicity for a press article in which he declared that the time has come for the world to demand that Europe rescue its currency.

Current Treasury incumbent Timothy Geithner's participation in last week's euro-group meeting and President Barack Obama's phone call to German Chancellor Angela Merkel had a clear, similar subtext: your problems are hurting us as well. Solve them.

Beyond the U.S., Brazilian Finance Minister Guido Mantega and Canadian Finance Minister Jim Flaherty have both urged Europe this week to get on with sorting things out.

And, if a euro-zone breakup remains officially unthinkable in Brussels, it certainly doesn't elsewhere. George Soros said in an interview this week that more than one of the weaker nations could leave the bloc, and economists such as Nobel Laureate Paul Krugman and Harvard's Kenneth Rogoff have speculated to differing degrees about a breakup. Neither considers it vanishingly unlikely, to put it mildly. Indeed Krugman went so far as to suggest we might be mere days away from the whole thing coming apart.

You don't have to agree with that, but the upshot of all these cries from the heart is simple enough. The euro zone must caulk its leaking hull if it can, and quickly. These demands are becoming ever more frequent and ever more shrill. If its leaders can't respond, then it's not so far-fetched to assume that the tune will change to a call for as orderly a preparation of the lifeboats as possible.

Write to David Cottle at david.cottle@dowjones.com