European Monetary Union (Unfortunately) Working As Planned

Kevin Drum ruminates on the European situation:

It’s easy to say this from a distance, but Merkel and other European leaders have their heads in the sand. They don’t want Greece, Ireland, or Portugal to default because that would mean big losses for banks in their own countries, which would then have to be bailed out. But they also don’t want to directly bail out the insolvent countries, because voters wouldn’t like that much. So they’re kicking the can down the road with half measures and hoping that somehow things turn up. It’s a recipe for stagnation at best and disaster at worst.

The scary thing is that this is more or less European monetary union working as planned. The introduction of a single currency has de facto committed the nations of Europe to a level of fiscal union that’s politically unacceptable. But total collapse of the European banking system is also politically unacceptable. So they’ll keep kicking the can down the road with half measures until ultimately they wind up much further down the road to fiscal union than anyone deems conceivable. And the same applies to labor market integration. There’s some level of sustained unemployment in Portugal that induces people to migrate to Copenhagen in search of work, and over the next five years we’ll find out what that level is. But in the interim we’re going to witness a lot of stagnation and disaster.

But this is basically the plan. Achieve political union by unleashing a doomsday device in the form of monetary union and assume that over time people can be dragged into making it work. The politicians in the UK and Sweden who kept their countries out of this deserve enormous credit.