Nick Rowe explains that the Eurozone’s woes go beyond inadequate labor market and fiscal integration, it’s not really even sufficient monetary policy integration:
But the lender of last resort matters more. The US has an effective lender of last resort. The Fed has the political authority to print as many US dollars as are needed. The only effective limits are the risks of inflation and moral hazard. The Eurozone does not have an effective lender of last resort. The individual Eurozone countries do not have their own central banks. The ECB lacks the political authority to print as many Euros as are needed.
Suppose you abolished the US Federal government. So you needed all 50 State governments to agree before the Fed could act as lender of last resort to one of those State governments. And suppose some of those US State governments had as much debt as Greece, or were bailing out their banks like Ireland. Think all 50 State governments would agree on anything? I don’t. (And they all at least speak the same language, and really do all think of themselves as part of the same nation). Think it would matter? I do.
Tim Fernholz’s five positive economic signs for 2011 is fairly persuasive to me, but the big problem is that there are a lot of possibility for new negative shocks. And the shocks coming from Europe, in particular, are potentially enormous. And I’m not at confident that we’ll respond adequately if shocks do come.