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The Real Way to Save the Euro

Thursday, 25 Oct 2012 | 3:54 PM ET
A man removes paint from the sign of the central bank of Greece following demonstrations in Athens, Greece, on Monday, Feb. 13, 2012.
Bloomberg
A man removes paint from the sign of the central bank of Greece following demonstrations in Athens, Greece, on Monday, Feb. 13, 2012.

If you really want to preserve the euro, this think tank says, look south.

How much is the euro zone in trouble? Let me count the ways. From Greece's near insolvency to Spain's lofty unemployment to Germany's slowing economy - and of course the political logjams that are everywhere - Europe's problems have many parents.

Really, though, there is one overriding threat to the euro's continued existence, according to Zsolt Darvas, a research fellow at Bruegel, the Brussels-based think tank.

"The single most pressing threat to the integrity, and perhaps also to the existence, of the euro is the depth of the recession in southern European member states, and their bleak economic outlook," he says.

Darvas argues that southern Europe is currently expected to fall far behind the U.S. in terms of GDP per capita, after roughly thirty years of relative stability on that score. As for job growth, "the employment situation is similarly miserable," he says.

Some argue that these problems are of southern Europe's own making, but Darvas says they have major implications for the rest of the euro zone:

"If the recession continues to deepen in Greece, social tensions could escalate, which may lead to domestic political paralysis. Under such circumstances, cooperation between euro-area partners and Greece, including financial assistance that has already been granted, could come to an end, leading to an accelerated and possibly uncontrolled exit from the euro area, causing devastating consequences for economically stronger countries as well."

So Darvas says restoring the economies of southern Europe to health is essential to resolving the euro zone crisis.

"Structural reform and appropriate fiscal consolidation in southern Europe, wage increases and slower fiscal consolidation in economically stronger euro-area countries, a weaker euro exchange rate, debt restructuring and a European investment program should be part of the arsenal," he wrote in a policy brief. "Economic growth in southern Europe would gradually help to improve the unemployment situation, public finances, asset prices, balance sheet of banks, and would reverse capital outflows. And without the problems of southern euro-members, western and northern members would be able to overcome their banking woes and the other roots of the euro crisis would have much lower relevance."

Food for thought.

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