The European union is a great idea in many ways. I traveled in Europe extensively before the EU countries dropped their border checks and I saw many multi-kilometer lines of trucks waiting to clear customs at each border—hardly a boon to productivity. But a common currency, without true economic union is an unsustainable setup.
The Germans and French might enable the European Common Bank to buy semi-infinite amounts of bonds from the troubled countries, but won’t that just delay the inevitable? Does anyone really believe that a respite (comprised of years of economic austerity and deprivation) will result in the Greeks, Italians, and Spaniards developing economies that resemble Germany’s? Is it reasonable to ask the people in the troubled countries to do this—just so that they can hang on to the Euro? The leaders in Germany and France were adamantly apposed to a Greek referendum on the topic—they know what the people’s response would be.
Not all members of the European common market use the Euro. The UK, Denmark, and Sweden haven’t adopted the Euro, and I suspect they are pretty happy about that right now. I believe it is a matter of when, not if that they will be joined by some de-Euro’d countries.
This transition will take months if not years to play out. Some speculators will be wiped out (e.g., MF Global), European banks at least will take a beating, and companies with Euro denominated debt might go bankrupt. But ultimately the EU members will realize that it is better to spend money addressing these problems rather than attempting to prop up an unsustainable common currency.
I don’t think the Euro drama will culminate in a 2008 US style financial crash because it is such a slowly evolving situation. Crashes require surprise and panic. Countries leaving the Euro will hardly be a surprise; I expect the Germans are already planning for it.