Robert J. Samuelson: Adopting the euro was Europe's worst policy mistake since WWII

WASHINGTON — By now, it's obvious that adopting the euro was a colossal blunder. It may rank as Europe's worst policy mistake since World War II. The virtues of the common currency — it reduced transaction costs and the uncertainty of fluctuating exchange rates among national monies — were temporary. Its vices seem permanent or, at least, semi-permanent: the mounting economic costs of saving the euro; the growing nationalism from arguing over who's to blame.

Do not expect some magical "solution." Europe has entered an economic and political purgatory from which there is no early escape. On paper, the crisis countries (so far: Greece, Portugal, Ireland, Italy and Spain) might benefit from abandoning the euro and resurrecting national currencies. They could then devalue these currencies, spurring exports and tourism. But in practice, this choice is dangerous and maybe impossible.

Any hint that a country might dump the euro would trigger runs on banks, as depositors sought to withdraw their euros. Banks would collapse. Deprived of buyers for their debt, countries would default. This would impose further losses on banks inside and outside the defaulting country. Without viable banks, borrowers would be starved for credit. There would be capital controls restricting the shift of funds abroad. If one country (say, Greece) left the euro, it might precipitate runs and capital flights elsewhere. Writing in The Financial Times, Citigroup chief economist Willem Buiter sketched this grim outlook:

"Disorderly sovereign defaults and eurozone exits ... would drag down not just the European banking system but also the North Atlantic financial system. ... The resulting financial crisis would trigger a global depression that would last for years, with GDP likely falling by more than 10 percent and unemployment in the West reaching 20 percent or more. Emerging markets would be dragged down too."

Given these terrifying possibilities, hardly anyone is eager to tempt fate and see whether they might actually occur. Buiter himself rates the probability of this doomsday outcome at no more than 5 percent; the assumption is that European governments — or someone — will avoid it by continued bailouts (loans to weak governments). But this creates other problems. It imposes austerity on countries and removes control of their budgets to third parties: the European Union or the International Monetary Fund (IMF).

The logic is plain. If debtors need rescuing, then the rescuers ought to have some say over the policies that might cause trouble. Under the latest agreement among European leaders, member countries have to submit their budgets to Brussels to certify that any deficit does not breach a ceiling of 0.5 percent of national income. There would be some unspecified transition, because most budgets are now in violation.

The potential for intrusiveness — and resentment — is obvious. Brussels might order tax increases or spending cuts. National sovereignty over basic political choices is being outsourced. Too much power is being centralized away from nation states. A backlash against the idea of Europe is possible and probable.

So Europe is trapped in purgatory. What's economically sensible is politically treacherous, and what's politically sensible is economically treacherous. Moreover, the euro's promise has been turned on its head.

When introduced in 1999, its overriding goal was clear. As an engine of shared prosperity, it would strengthen a common European consciousness. Germany's power would be subordinated to the larger project of a united Europe. Now, everything is reversed: The euro is undermining Europe's economy, sowing conflict (Britain has rejected the latest package) and elevating Germany — as the economically strongest state — to set terms for dealing with the crisis.