18 January 2011
Back in the 1960s, Ronald Reagan famously said there were no easy answers to the U.S.’s then growing problems, but that there were simple answers. In a way, today’s Europe may resemble Reagan’s view of America.
The future of the euro zone doesn’t look bright. Still, there are simple answers to the problems in the euro zone, although we lack leaders with the political courage to pursue them. At every turn, Europe’s political elite demonstrate shortsightedness and a desire for the easy route.
The first question the EU must address is how to untangle the mess in which the euro zone finds itself. The adoption of the euro brought some benefits to its members. In particular, it depoliticized monetary policy in a number of countries in which governments had traditionally debased their currencies. Arguably, however, the adoption of the euro has prevented monetary policy from adjusting to shocks and has led to economic dislocation in some of its members.
Euro-zone members have only two options—both are simple but neither is easy. The first involves radical liberalization, in particular labor-market liberalization, to ensure that euro-zone economies are flexible enough to respond to shocks. The second is to contemplate a euro-zone breakup.
Read the rest of the article on the Wall Street Journal website.