How to revive the Euro economy: begin with a one-time devaluation of the weaker economies followed by structural reforms.

• Author: Meltzer, Allan H.

After five years of stagnation, the once-bright prospects promised for the euro have vanished. Citizens of major countries--Germany, France--join other once-strong proponents of "United Europe" in demonstrating against the European Union. The massive rallies and growing opposition parties do not distinguish between the failing monetary union and the European Union. They do not like what they are getting and want more than the poor future they expect.

The main objective of the European Union was to join Germany and France in an arrangement that would avoid another European war. As other countries joined the union, that objective remained and other objectives were added. A common monetary policy with a common currency was promoted as a way of maintaining low inflation in member countries, avoiding periodic currency crises and devaluations, and promoting economic growth.

Inflation has remained low, but economic growth and employment outside of Germany and a few other countries has been disappointing. Gross and net investment show a weak expected future. Gross capital formation has fallen to the level reached in 2000, and net capital formation is negative. Expected growth of output is 1 percent or less. Still others want to make Germany buy the government debt of other member countries. This would convert the European Central Bank into a successor to the Bank of France instead of the successor to the Bundesbank. It effectively repeals the commitments made in the Maastricht Treaty.

Skeptics warned from the start in 1999 that the agreements in the Maastricht Treaty were incomplete. Critics said that a common currency can succeed if and only if there are compatible arrangements for relative price and real wage changes. Without such arrangements, real production costs do not adjust in a timely way that a common currency requires. Regulation, taxation, and government spending policies in such principal countries as France and Italy hinder any adjustment.

After adopting the euro, France and Italy chose labor market policies that strengthened strong unions but discouraged new hiring.

The Schroder government in Germany recognized that German production costs limited Germany's ability to export. Labor market and pension reforms changed that. The next German government, led by Chancellor Angela Merkel, became an export powerhouse because of its excellent products such as machine tools along with very competitive prices. Some other members of the currency...