Can the euro be saved?:
Apocalypse Fairly Soon, by Paul Krugman, Commentary, NY Times: Suddenly, it has become easy to see how the euro — that grand, flawed experiment in monetary union without political union — could come apart at the seams ... with stunning speed, in a matter of months... And the costs — both economic and, arguably even more important, political — could be huge. ...
Greece is, for the moment, the focal point. Voters who are understandably angry at policies that have produced 22 percent unemployment — more than 50 percent among the young — turned on the parties enforcing those policies. And ... the result ... has been rising power for extremists. ... Greece won’t, can’t pursue the policies that Germany and the European Central Bank are demanding.
So now what? Right now, Greece is experiencing ... a somewhat slow-motion bank run, as more and more depositors pull out their cash in anticipation of a possible Greek exit from the euro. Europe’s central bank is, in effect, financing this bank run by lending Greece the necessary euros; if and (probably) when the central bank decides it can lend no more, Greece will be forced to abandon the euro and issue its own currency again.
This demonstration that the euro is, in fact, reversible would lead, in turn, to runs on Spanish and Italian banks. Once again the European Central Bank would have to choose whether to provide open-ended financing; if it were to say no, the euro as a whole would blow up.
Yet financing isn’t enough. Italy and, in particular, Spain must be offered hope —... some reasonable prospect of emerging from austerity and depression. Realistically, the only way to provide such an environment would be for the central bank to ... accept and indeed encourage several years of 3 percent or 4 percent inflation...
Both the central bankers and the Germans hate this idea, but it’s the only plausible way the euro might be saved. ... So will Europe finally rise to the occasion? Let’s hope so... For the biggest costs of European policy failure would probably be political.
Think of it this way: Failure of the euro would amount to a huge defeat for the broader European project, the attempt to bring peace, prosperity and democracy to a continent with a terrible history. It would also have much the same effect that the failure of austerity is having in Greece, discrediting the political mainstream and empowering extremists.
All of us, then, have a big stake in European success... The whole world is waiting to see whether they’re up to the task.