Tony Barber believes that saving the Euro is crazy and that letting it die is crazy, too. He also believes that the drama will pause this summer to allow the Euros to go on vacation. Crises do not take vacations, and neither do I. This gives me a good chance to write about the problem at the heart of the EZ.
Less productive countries need a weaker currency to remain competitive. Italy ran higher inflation rates before joining the euro. This means that the lire would slowly devalue, and the price of an Italian worker would decrease on the world market keeping the Italian worker competitive. If Italy is not able to devalue their currency, the price of the Italian worker will rise and economic activity will go elsewhere. Italy then needs money to maintain its living standard.
This money must come from the countries in the opposite position. While Italy was the victim of rising unproductivity due to a strengthening euro, countries like Germany were using a currency that was weaker than they should have resulting in relatively cheaper labor and higher productivity. The Germans, Dutch, Austrians and Finns now realized higher growth and higher living standards while creating a surplus. At first, the Northern banks were lending this surplus back to the southern Euros so that they could continue buying Northern exports to maintain their standard of living.
When the crisis started in Greece, the banks started getting wary of having so much money in the southern countries and started deleveraging. As the deleveraging rose to a crescendo, the ECB creating new debt to replace the old to keep all of the banks from failing. Since the deleveraging is continuing, the question now is who is going to pay for the necessary loans to keep the party going. If the northern countries will not, or cannot, then the EZ is going to have to break up. The internal imbalances are unsustainable, and foreign financing is not available to clean up this mess.
If the northern Euros want to keep the EZ together, it is going to be very expensive. On the other hand, if the EZ breaks up, it will be very expensive. The politicians on the continent are not being honest with their constituents, because they will be thrown out of office if they are. No matter what you see in the markets, remember that eventually the EZ will have to crash whether it is because of the expense of preserving the euro or the expense in leaving. Only a fool will claim to know when this will happen.