The Euro's Endless Horror: Or end to the horror.

• Author: Lachman, Desmond

According to an old German saying, an end with horror is better than a horror without an end. Judging by the eurozone's disappointing economic performance over the past twenty years, this saying might provide a useful way to frame the fundamental policy choice facing European economic policymakers in a post-coronavirus world.

Will European economic policymakers perpetuate the horror of the eurozone's poor long-run economic performance by allowing the European Central Bank to keep the euro afloat by further substantially expanding its already bloated balance sheet? Or, in the interest of enhancing the eurozone's long-term economic performance, will they allow the euro to unravel despite the immediate economic horror that the euro's unraveling would surely entail?

THE EURO'S DISAPPOINTING PERFORMANCE

It would be a gross understatement to say that since its 1999 launch, the euro has failed to deliver on its promise. Far from promoting European economic prosperity and narrowing the economic gap between the eurozone's southern and northern member countries, over the past twenty years the eurozone's overall economic growth rate has been mediocre at best while the economic gap between its core and peripheral countries has only widened. Far from putting the periphery's public finances and banking systems in better order, the eurozone periphery's public debt-to-GDP levels remained uncomfortably high and its banks remained weak.

The euro has also failed to deliver on its promise of promoting a European political union. Instead, we have seen growing mutual resentment between the eurozone's north and south as well as strong resistance in the north to any idea of a European fiscal or banking union. We have also seen disturbing political fragmentation, rising nationalism, and declining support for Europe across much of the eurozone area.

THE EURO STRAITJACKET

At the heart of the eurozone's disappointing economic performance to date is the original policy mistake of tying in a monetary union a strong economic performer like Germany and weak productivity performers like Italy and Greece. It also did not help matters that following the 2008-2009 Great Economic Recession, Germany insisted on imposing fiscal austerity on the eurozone's economic periphery at a time of considerable economic weakness.

The disparate productivity performance between Germany and the eurozone's economic periphery resulted in a progressive loss in the periphery's international...