The design flaw at the heart of the euro zone has become manifest to a variety of market observers, practitioners, economists and journalists. A fiscal/monetary half-way house divided cannot stand. That seems to be clear.
So what’s the answer? Both Paul Volcker and Mervyn King have recently suggested a fully fledged supranational fiscal union to complement the supranational central bank, the ECB. I wonder whether that truly is the best option. A "United States of Europe" could well represent something, if not as extreme as, that of Yugoslavia, before it disintegrated in the 1980s. The relatively rich republics of Yugoslavia (Slovenia and Croatia) resented policies that transferred of wealth to the relatively poorer republics, like Serbia, Macedonia, Montenegro, or the autonomous region of Kosovo. Once Tito’s organizing genius disappeared, the linkages stitching the country together became frayed and eventually snapped as old grievances manifested themselves in newer forms. The same type of evolution could happen to the Europe Union if it underwent a supranational fiscal union, where the rich countries feel they are being unfairly burdened — the beginnings of which are already in evidence.
The great achievement of the EU has been to reduce the probability of violent nationalist conflict among some of its members to a vanishing small probability while improving the economic lot of its members. Most of this reduction in the propensity toward violence and economic growth took place before the adoption of the Euro. It may be that giving up the Euro is the wiser alternative in the long run, unless someone can synthesize some kind of third option, which hardly seems likely.