Europe is a little like a classic Greek tragic hero, brought low by a singular act of hubris: the creation of the euro. In a lengthy piece in the New York Times, Paul Krugman argues that the euro was always a dubious idea, but European leaders “engaged in magical thinking” and pretended the downsides didn’t exist. Chief among those downsides is that individual Eurozone nations have lost their monetary flexibility. When Ireland has a crisis, it can’t just devalue its currency—it has to endure painful deflation.
Of course, US states can’t devalue their currency, either. But they have the benefit of a central federal government to prop them up, and a mobile workforce that can move when jobs are scarce. European nations have neither—language barriers discourage migration, and strong countries, especially Germany, refuse to help weaker ones. But that has to change if the Eurozone's to survive, Krugman argues. “Odds are the current tough-it-out strategy won’t work. ... Europe’s stronger nations will have to make a choice.”