Was The Euro a Mistake?

Paul Krugman balances his apologies for European-style socialism with the observation that they don’t get everything right. In particular, before the creation of the Euro, skeptics warned that monetary union would deprive countries of the fiscal and exchange rate policy tools they need to respond to a sharp economic downturn. And now it’s happening:

Was the euro a mistake? There were benefits — but the costs are proving much higher than the optimists claimed. On balance, I still consider it the wrong move, but in a way that’s irrelevant: it happened, it’s not reversible, so Europe now has to find a way to make it work.

That seems right to me. It’s also a reminder, though, that while it’s very fair to loosely equate “Europe” with high taxes, it’s not right to think of the United States and Europe as offering systematically divergent economic policies along the lines of a left-right divide. Thanks in part to the Euro, countries like Ireland are now offering us a case study in a strongly non-Keynesian, real business cycle approach to economic calamity. You do neither fiscal nor monetary easing, have the government slash public expenditures to meet the new lower revenue level, and you wait for cycles of wage and cuts to bring the economy down to a sustainable post-bubble level.