Lately, financial news has been dominated by reports from Greece and other nations on the European periphery [...] I’ve been troubled by reporting that focuses almost exclusively on European debts and deficits, conveying the impression that it’s all about government profligacy [...] For the truth is that lack of fiscal discipline isn’t the whole, or even the main, source of Europe’s troubles [...] No, the real story behind the euromess lies not in the profligacy of politicians but in the arrogance of elites — specifically, the policy elites who pushed Europe into adopting a single currency well before the continent was ready for such an experiment.
So far, so good, and then Krugman continues, using Spain as an example of what can go wrong (though Ireland, with its ongoing drastic economic belt-tightening, might have served almost as well):
... there’s not much that Spain’s government can do to make things better. The nation’s core economic problem is that costs and prices have gotten out of line with those in the rest of Europe. If Spain still had its old currency, the peseta, it could remedy that problem quickly through devaluation — by, say, reducing the value of a peseta by 20 percent against other European currencies. But Spain no longer has its own money, which means that it can regain competitiveness only through a slow, grinding process of deflation.
Now, if Spain were an American state rather than a European country, things wouldn’t be so bad. For one thing, costs and prices wouldn’t have gotten so far out of line: Florida, which among other things was freely able to attract workers from other states and keep labor costs down, never experienced anything like Spain’s relative inflation. For another, Spain would be receiving a lot of automatic support in the crisis: Florida’s housing boom has gone bust, but Washington keeps sending the Social Security and Medicare checks.
But Spain isn’t an American state, and as a result it’s in deep trouble.
Again, nothing Krugman says here is in the least controversial*at least outside those circles frequented by Europhile fantasists: all of the problems he points out with regards to regional adjustments to economic cycles are issues which were highlighted well in advance of monetary union, only to be shrugged aside by continental politicians as the idiotic ramblings of small-minded nationalists.
For European monetary union to work in the absence of inter-state financial flows of an order politically unacceptable to the citizens of the wealthier EU states (and in particular, to the folk of the EU's traditional paymaster), labor mobility must take up the slack, and yet if there's one thing that Europeans are not known for - especially by comparison with North Americans - it is a willingness to move long distances in search of work even within the borders of their own nations, let alone between them. Besides, even if such a will to move did exist, there are practical difficulties which hinder such mobility, not least of which is the sheer number of languages spoken across the continent, each jealously championed on the national level against the "threat" supposedly posed by English. Even if one had the time and ability to master French, German, Italian and Spanish, that would still leave one incapable of communicating in the national languages of the majority of EU states!
Of course, all of the above discourse assumes that once the language barrier has been overcome, the rest will be plain sailing, but this ignores the xenophobic realities which plague most of Europe. To illustrate, as bad as would-be immigrants from Africa and Asia may have it, the welcome extended in Germany to workers from Eastern Europe has been anything other than warm, and even in a supposedly more inviting Britain, the usual tabloid suspects have regularly plumbed the lowest depths in search of fodder to use to agitate their audience of "Little England" curtain-twitchers. If this is how the "Daily Mail" and its ilk behaved when times were good, one can only imagine to what extremes will they go in the face of much larger numbers of job-seeking newcomers from the continent - and again, Britain is actually on the more liberal end of the spectrum on such matters as far as Europe is concerned ...
Paul Krugman's conclusion as to the likely way forward for Europe is one that I suspect is correct, even though I very much wish it were wrong: slow growth on the continent is not good news for anyone, as it means slower growth in continental European demand for external goods and services.
A breakup of the euro is very nearly unthinkable, as a sheer matter of practicality. As Berkeley’s Barry Eichengreen puts it, an attempt to reintroduce a national currency would trigger “the mother of all financial crises.” So the only way out is forward: to make the euro work, Europe needs to move much further toward political union, so that European nations start to function more like American states.
But that’s not going to happen anytime soon. What we’ll probably see over the next few years is a painful process of muddling through: bailouts accompanied by demands for savage austerity, all against a background of very high unemployment, perpetuated by the grinding deflation I already mentioned.
By the way, I suggest that those who are not well-informed about the theory of optimal currency areas read Krugman's earlier article on the issue.