Maximum Currency Union

Paul Krugman sums up the European tragedy:

A rich, productive continent, which has produced arguably the most decent societies in human history, is tearing itself apart because its elite insisted on embarking on a dubious monetary project, and now can’t bring itself to take the steps necessary to give that project a chance of working.

It is worth reflecting on how much “the steps necessary to give that project a chance of working” are. Think about the level of fiscal exposure a person living in the (rich) Bay Area has to a poor region like Mississippi or West Virginia. It’s essentially unlimited. You’re jointly on the hook for pensions (Social Security) and an extremely generous single-payer health care program for elderly people (Medicare). Those programs jointly, along with Medicaid, aren’t just useful to the program beneficiaries. They’re the pillars of local hospital industries and medical professions, supporting indirectly an array of secondary industries. You’re jointly on the hook for national defense, both as a public service and as an employment opportunity. There’s no real conditionality to any of it. If Mississippi makes bad policy choices that reduce average incomes, the net scale of the transfers goes up. But there’s more to it than formal legal commitments. If a giant lizard crawls out of the Gulf of Mexico and tears up I-55, Congress is going to pony up the funds to fix the highway. It goes on and on and on and there’s just no real limit at the end of the day to the joint exposure. It’s one country we’re all living in as citizens, and we’re all jointly exposed to each other’s public affairs.

Now it’s not that in order to resolve this particular crisis Europeans need to make that kind of leap. But ultimately to “make it work” that’s where you have to go. And if you don’t want to go there, you ultimately need to bust up the currency union.