Seeing No Evil On The Eurozone

Here’s Nouriel Roubini, trying to explain to Italy’s economy minister the problems with the Euro and the possible future need for Italy to leave, and getting shouted down for his trouble. “Serious discussion of the risks and possible downsides was simply not allowed,” recalls Paul Krugman, “If you were an independent economist expressing even mild concerns about the project, you were labeled as an enemy and shut out of the discussion.”

Oddly, though, part of the misconceived nature of the project is that adopting this see no evil attitude toward it is the only possible way to make it work. The whole idea of having a single currency is that 100 Euros in an Italian bank is just as good as 100 Euros in an Austrian bank. It’s all the same money. But if you think there’s some chance that in the future Italian Euros will be converted into Nuova Lira and Austrian Euros will be converted into Grossdeutschmarks, then all kinds of Italian firms and wealthy Italian individuals will be acting to shift as much of their funds as possible into Austria. This action, breaking the Italian banking system and starving the Italian economy of investment funds, is itself going to increase the stress on the economic union and make breakup more likely. What’s more, the main reason to think that leaving the Euro would be disastrous is precisely that it would create bank runs. Once bank runs are already happening, the costs of leaving get lower and the likelihood of even more bank runs increases.

Consequently, for the system to work you need discussion of a breakup to be completely taboo. Once it becomes widely discussed, the mere fact of the discussion becomes a huge problem. But of course rendering a subject taboo and shouting down skeptics produces a kind of insular groupthink, bungling, etc.