Who Fixes the Euro?

http://blogs.hbr.org/hbr/hbreditors/2011/06/who_fixes_the_euro.html

Talking to an Irish friend recently, I got a splendid take on the euro-crisis. As he pointed out, there are two sides to the growing European sovereign debt crisis. Yes, the feckless peripheral countries on the fringe engaged in an ill-judged splurge on property and their governments borrowed and spent with abandon.

But the banks holding the savings of the core members — including most of Germany's supposedly stodgy but actually reckless state banks — were happy to fuel the binge. They may also have counted on an implicit guarantee from their governments. Although bailing out the improvident Greeks might strike voters as a bad idea, letting Germany's state banks go to the wall would be far worse.

And as long as it was only Greece in trouble, a bailout made sense. It signaled that core members stood behind the euro and with a bit of luck and a following wind you could hope that the markets might not get too worked up about Portugal, Ireland, and Spain. The Greeks might even clean up their act. If it worked, it would be a lot cheaper than having to bail out Germany's banks.

Wishful thinking. Two more country bailouts later and here we are trying to fix Greece yet again. And the severity of the spending cuts needed to let Greece and its fellow peripherals pay off their foreign debts will doom their economies to years of stagnation. The consequences of this — social and economic — could be comparable to what the Eastern and Central Europeans suffered under communism.