The Euro will break up when the major forces holding it together begin to work against one another. At the moment there is immense pressure on the members of the Eurozone to keep the Euro intact, because any change--such as Greece leaving--would be detrimental to the world economy.

Those who look at the Euro see an imperfect structure struggling to cope with changes in its internal and external environments. They argue the stresses that the Eurozone is under--the debt problem in peripheral countries, the banking problems, the unemployment and social unrest-will eventually tear it apart.

They don't understand the history of the European Union. It was created as an economic solution to a political problem--how to stop the nations of Europe from killing each other. The strategy pursued since the second world war has been incremental integration when times are good. So for example in the early 1990s, during the Maastricht Treaty negotiations, it was clear to everyone that the structure they were building--a single European Market--could not cope with large internal shocks.

The example they used with one another was an earthquake in Luxembourg. What would they do? What would or could be done, under the Maastricht Treaty's rules, to help a nation state that had gotten itself into trouble unexpectedly?

There was an argument made for fiscal transfer funds to help nations that had this problem, but those negotiating the Treaty dropped it. The Maastricht Treaty represented the maximum increment of integration they could achieve.

The process that has guaranteed the Eurozone's success--incremental integration--is the very thing that is harming it now. The Eurozone's leaders take an age to decide on a course of action, and then promise the bare minimum to heal the banks' balance sheets. It is not enough, confidence is eroded further, and things get worse. This is the dynamic that has played out across the nations of Europe, from Greece to Ireland to Portugal to Italy and now to Spain, and it shows no sign of stopping.

Yet the ties that hold the Eurozone's members together are very strong. In the end, they will do what is necessary to secure the Eurozone's future. What is not certain is which nations will be a part of that Eurozone. Personally, I think both Ireland and Greece should stay within the Eurozone. I think anything else is detrimental to the security and prosperity of each country. I can't see the populations of either country voting in parties that would harm their own electorates to the extent that leaving the Euro would damage them. Only the people of the nation can decide to leave a common currency area.

Household's savings would evaporate, businesses would collapse, banks would impose capital controls, there would be months of uncertainty and turmoil. And in the end of it all, we would be poorer for the move


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Capital inflows, crisis and recovery in small open economies

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