A Power Vacuum is Killing the Eurozone

That is the title of my latest column, here is one excerpt:

We thus face the danger that the euro, the world’s No. 2 reserve currency, could implode.  Such an event wouldn’t be just another depreciation or collapse of a currency peg; instead, it would mean that one of the world’s major economic units doesn’t work as currently constituted.

We are realizing just how much international economic order depends on the role of a dominant country — sometimes known as a hegemon — that sets clear rules and accepts some responsibility for the consequences.  For historical reasons, Germany isn’t up to playing the role formerly held by Britain and, to some extent, still held today by the United States.  (But when it comes to the euro zone, the United States is on the sidelines.)

THERE appears to be a power vacuum, and the implications are alarming. We may be entering a new world where international cooperative arrangements, in environmental areas as well as finance, are commonly recognized as impossible.  If the core European nations cannot coordinate effectively, what can we expect in dealings with China, Russia and other countries that have less of a common background and understanding?

I consider this a big deal, even beyond its immediate macroeconomic ramifications, which of course are a big deal too.

There is a second, more technical point too:

…some of the banking systems in the periphery nations may be too broken for monetary policy to take hold.  Imagine the European Central Bank trying to infuse new money and credit into Spain, while bank deposits move quickly to Germany, Switzerland and other safer places.  Again, why would anyone want to keep money in the bank of a fiscally troubled nation?  That loss of confidence will not be easily repaired.

At this point, probably euro-wide deposit insurance is needed before monetary policy can help in Greece or Spain (that wasn’t true two years ago).  Yet creating a eurozone-guaranteed safe asset in those economies ultimately boils down to the eurobond idea, which of course the Germans are reluctant to do.

Here is a related Op-Ed from Mark Mazower, focusing on the theme of a collapse of European and international cooperation.  Here is a good article on why plans for tighter political union in Europe will not easily work.  There is talk the UK will cut off migrants if the euro collapses.  Switzerland may introduce capital controls.  What else?  I do not see this turning out well.