THE crisis in Greece and the debt problems in Spain and Portugal have exposed the euro's inherent flaws. More than ten years of smooth sailing since the euro's creation, the arrangement's fundamental problems have become to surface with obvious reasons.
The single currency for 16 separate and quite different countries seem to have failed and the shift of single currency meant that individual member countries lost the ability to control monetary policy and interest rates in order to respond to national economic conditions. It also meant that each country's exchange rate could no longer respond to the effects of differences in productivity and global demand trends that have accumulated. The single currency weakens the market signals that would otherwise warn a country that its fiscal deficits were becoming excessive. A country with excessive fiscal deficits needs to raise taxes and cut government spending, as Greece does now, the resulting contraction of GDP and employment cannot be reduced by a devaluation that increases exports and reduces imports.
Why the United States is able to operate with a single currency, despite major differences among its 50 states? There are three key economic conditions - none of which exists in Europe - that allow the diverse US to operate with a single currency: labour mobility, wage flexibility and a central fiscal authority. When the textile industries in America's north-eastern states died, workers moved to the west, where new industries were growing. Unlike the unemployed workers of Greece, Portugal and Spain they do not move to faster-growing regions of Europe because of differences in language, history, religion, union membership, etc. Moreover, wage flexibility meant that substantially slower wage growth in the states that lost industries helped to attract and retain other industries.
US fiscal system collects roughly two-thirds of all taxes at the national level, which implies an automatic and substantial net fiscal transfer to states with temporarily falling incomes.