Nothing better illustrates the perverse logic of monetary union without fiscal union than the fact that faced with slow growth, high unemployment, and excess capacity the government of France is announcing new austerity measures to offset worse-than-expected growth.
Start as optimistic as you like about this economic approach. Say it’s worked for Ireland. Austerity and internal devaluation at home leads to an increase in exports and a return to full employment. Good for Ireland. But Ireland is tiny relative to the EU. When domestic Irish demand declines, few other countries notice the hit this entails to their exports. But Spain isn’t tiny. Italy is even less tiny. And France is even less tiny. Spanish austerity hurts Italian and French exports. Italian austerity hurts Spanish and French exports. French austerity hurts Italian and Spanish exports. And the Germans who think they favor this course of action are, of course, also hurt. Their exports don’t just leave the country by magic. So down the drain we go.
If these countries had independent currencies, a very similar “beggar thy neighbor” game would amount to coordinate expansionary monetary policy and have a totally different aggregate impact.