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The euro was sold to us as a modernization program for Europe, and we were also told that it would push the Community toward stability. But, in reality, it has drifted apart and become a truly unstable entity.

The euro was sold to us as a modernization program for Europe, and we were also told that it would push the Community toward stability. But, in reality, it has drifted apart and become a truly unstable entity.

There is no reason why the euro should be coming under pressure. The decision to introduce it was smart and far-sighted.

thanks to the common currency, it's no longer possible, for example, to wage speculative attacks on individual currencies. This eliminates a key disruptive factor that massively destabilized markets in the past.

Still, thanks to the common currency, it's no longer possible, for example, to wage speculative attacks on individual currencies. This eliminates a key disruptive factor that massively destabilized markets in the past.

Starbatty: But that's exactly the problem! In the past, exchange rates served as a valve. Individual countries could control their economies by allowing their currencies to gain or lose value.

But that's exactly the problem! In the past, exchange rates served as a valve.

SPIEGEL: What would happen if the old currencies were reintroduced in the euro zone tomorrow? Bofinger: It would be a catastrophe. The German mark would have to appreciate significantly -- I'd say by 10 percent to 20 percent. Everything that we've worked so hard to attain in terms of competitiveness would vanish overnight.

What would happen if the old currencies were reintroduced in the euro zone tomorrow? Bofinger: It would be a catastrophe. The German mark would have to appreciate significantly -- I'd say by 10 percent to 20 percent. Everything that we've worked so hard to attain in terms of competitiveness would vanish overnight.

SPIEGEL: Would it have been better if all countries in Europe had kept their own currencies? Starbatty: Yes. A community can't function when it's made up of unequal partners who are supposed to behave as equals. With the euro, Germany has created an artificial competitive advantage for itself, which has enabled us to conquer markets all over the world.

Starbatty: Yes. A community can't function when it's made up of unequal partners who are supposed to behave as equals. With the euro, Germany has created an artificial competitive advantage for itself, which has enabled us to conquer markets all over the world.

Since 1995, there have been almost no appreciable wage increases in Germany, partly as a result of pressure brought on from increases in subcontracted labor. Politicians have done everything to relieve employers of the burden of paying social security contributions because we fell into this strange panic, believing we weren't globally competitive. With our economic policies, we placed too much of a lopsided emphasis on exports.

Politicians have done everything to relieve employers of the burden of paying social security contributions because we fell into this strange panic, believing we weren't globally competitive.

Unlike their northern neighbors, the countries in the zone’s southern half have difficulty placing bonds — issued to finance their national deficits — with international capital investors. Nor are these countries competitive in the global economy, as shown by their high trade deficits.

If Greece were outside the euro zone, for example, it could devalue its currency

Instead, the fiscal strictures of the euro zone are forcing the country to curtail public expenditures, raise taxes and cut government employees’ salaries, actions that may push Greece into a deep depression and further undermine its already weak international credit standing.

In short, th

e euro is headed toward collapse.

hat opportunity and pull out of the euro, it wouldn’t be alone. The same calculus would probably lure Austria, Finland and the Netherlands — and perhaps France — to leave behind the high-debt states and join Germany in a new, stable bloc, perhaps even with a new common currency.

If Germany were to take t

A strong-currency bloc could fulfill the euro’s original purpose. Without having to worry about laggard states, the bloc would be able to follow a reliable and consistent monetary policy that would force the member governments to gradually reduce their national debt. The entire European economy would prosper. And the United States would gain an ally in any future reorganization of the world currency system and the global economy.

These countries have to do what they need to do. There’s no question there has to be fiscal consolidation. We can discuss the pace, but it has to happen. The other is competitiveness, which I see as much tougher of the two.

Take the big two, Italy and Spain. You can always dream of more, but I think they’re serious about doing it, both on the fiscal front and the structural-reforms front. I think it may well be that even if they do everything they can, and do it right, it’s still not enough. They have to have help — I would say when needed rather than if needed.

It’s not that I don’t care about the way it’s done. But I care about the result. These countries, if they’re doing the right things, they have to be able to finance themselves.

Some people say a euro depreciation would help Europe a lot. I think there is an argument for it, even in a multilateral context. You have to depreciate vis-a-vis somebody, so somebody has to appreciate. My sense is we would like most of the depreciation to be vis-a-vis emerging-market countries. Even if there was a depreciation vis-a-vis the dollar, I still think it would be a good thing.

The authors come up with a variety of numbers, including one that has received a lot of attention: potential G.D.P.—broadly speaking, the level of G.D.P. consistent with stable inflation—“is currently about 7 percent below the trajectory it appeared to be on prior to 2007.” According to the latest figures from the Commerce Department, the G.D.P. is now close to seventeen trillion dollars, and seven per cent of that figure is $1.2 trillion. This is a lot of money to have gone missing, especially if it will never be recovered. Hence Krugman’s dire conclusion: “By tolerating high unemployment we have inflicted huge damage on our long-run prospects …. What passes these days for sound policy is in fact a form of economic self-mutilation, which will cripple America for many years to come.”

As well as figuring out the current level of potential G.D.P., the authors estimate its growth rate. This is the more important figure, because it’s what determines living standards over the long term

In the nineteen-eighties, Larry Summers and Olivier Blanchard, who is now the chief economist of the I.M.F., resurrected the idea and gave it a new name, which they borrowed from engineering: hysteresis. Blanchard and Summers examined hysteresis in Europe, where high rates of unemployment have long been a problem.

The good news is that things aren’t quite as bad as the figures in the Fed paper might suggest. If we can get policy right and sharply increase the level of over-all demand in the economy, most of the damage done in the past five years is reversible.

At the moment, sadly, there is no prospect of any more fiscal stimulus, let alone a war-sized one, and the onus is falling on the Fed to gee up the economy.

But the short-run policy tradeoffs that many of these countries face – damned if they tighten monetary and fiscal policy fast enough, and damned if they do not – remain ugly.

As it is widely known, transfer pricing is the major tool for corporate tax avoidance, and it creates current account deficit when a multinational company receives from its own branch

abroad, the previously transferred own profit, as a debt.

The move in Europe to monetary union for weaker countries was a credibility enhancing mechanism that would lower borrowing costs. For countries that had strong creditor positions, the attractions of monetary union lay in the depoliticizing of the adjustment process (James 2012). The Eurozone worked quite well as a disciplining mechanism before it entered into effect, but much less well afterwards.

Banking expanded after the establishment of the euro (Shin 2012). No adequate provision on a European basis existed for banking supervision and regulation, which like fiscal policy, was left to rather diverse national authorities. An explosion of banking activity occurred simultaneously with the transition to monetary union and may well have been stimulated by the new single money.

Opinion poll data shows a major increase in hostility to the EU in peripheral countries, but with no corresponding unpopularity of the common currency.

In the areas that are sound, it is mainly that TPP members will probably have to approach the US norms faster than desirable, and possibly faster than they can effectively administer. But there are also areas in which the TPP is not in the interests of most non-US members.

However, it is generally accepted that TTIP is more important to Europe than to the US, which greatly strengthens the US’s hand in negotiations.

it is widely accepted that the deeper intra-European integration fostered by the Single Market initiative was a major contributor to European prosperity between 1992 and 2007

he US has strongly promoted Investor-State Dispute Arbitration in which foreign-owned private firms can seek settlements against governments for taking actions that are not prohibited by the agreements but which reduce the value of investments that the firms have made in member countries.

For states that do not have a lot of, say, social or environmental legislation at the time TPP is signed, Investor-State Arbitration threatens to make progress in these dimensions difficult.

This reads very much like an agreement to cooperate to make sure that outcomes in the trading system are as the US and EU want them – and with around half of world GDP between them and a further 15% in the rest of TPP, it suggests that the choice facing other will be capitulation vs. exclusion. I fear the latter.

Champions of the multilateral system must be much more explicit about its virtues and value – and among these I include Europe (middle-sized countries with a strong belief in negotiated outcomes and order) and China (which has been a massive beneficiary of open markets and non-discrimination to date).

urope had better get on with an internally driven liberalisation, especially of services and utilities markets, to stimulate the recovery quite independent of the outside pressures of a trade negotiation;

Willem Buiter, Chief Economist at Citigroup, has been most vocal in predicting that these facilities will be inadequate when Spain and Italy hit the wall and that more extreme measures will have to be taken.

The basic dilemma here is that almost all of the eurozone governments including Germany carry high debt burdens in excess of the Maastricht Treaty. For example, Germany has been in breach of Maastricht Treaty in 8 of 10 years since 2002, has been over the Maastricht 60% hurdle in each of those ten years, and now carries a debt to GDP burden above 80%.

cross-border banking through foreign subsidiaries has been beneficial for investors, and for home and host countries alike – nowhere more so than in emerging Central and Eastern Europe, still the most important export market for the eurozone.

Along with institutional reforms at the European level – particularly the creation of the European Systemic Risk Board and the European Banking Authority – regulation and supervision have been reinforced in subsidiaries’ host countries.

Meanwhile, the share of coal – the dirtiest fuel – has been rising, not falling, in the rest of the world’s energy mix.

Put differently, if the world continues to build coal-fired power plants at the current rate, those plants will still be around in 2050, regardless of what other technologies become viable in the meantime.

Even a serious fracking mishap would be unlikely to cause as much damage as the Deepwater Horizon oil spill in 2010, the Fukushima nuclear catastrophe in 2011, or coal-mining tragedies that play out dramatically in frequent explosions and collapses (and more insidiously in the form of lung disease, water pollution, and soil erosion).

The result was rapid growth combined with significant inflation: between 2000 and 2008, the prices of goods and services produced in Spain rose by 35 percent, compared with a rise of only 10 percent in Germany. Thanks to rising costs, Spanish exports became increasingly uncompetitive, but job growth stayed strong thanks to the housing boom.

Then the bubble burst.

But the flood of red ink

was a result, not a cause, of Spain’s problems.

The nation’s core economic problem is that costs and prices have gotten out of line with those in the rest of Europe. If Spain still had its old currency, the peseta, it could remedy that problem quickly through devaluation — by, say, reducing the value of a peseta by 20 percent against other European currencies. But Spain no longer has its own money, which means that it can regain competitiveness only through a slow, grinding process of deflation.

Then and now, monetary policy could not persuade frightened people to spend and invest.

The second Keynesian lesson was the need for some international structure to balance surplus and deficit nations.

Europe has responded to the crisis with the very British approach of muddling through, but King predicts it won’t work. Creating a true federal union, while an admirable goal, will be the work of a hundred years; the only quick way for countries to adjust is the breakup of the euro zone. King thinks the euro zone must confront the basic choice between accepting a transfer union or changing the membership of the monetary union. “Muddling through” isn’t a serious option.

The other way is to move to what is called a territorial system, one in which countries tax only profits earned in those countries.

In this country, notwithstanding the high rate, the corporate income tax now brings in about 18 percent of all income tax revenue, with individuals paying the rest. That is half the share corporations paid when Dwight Eisenhower was president.