The Euro Is Doomed

NEW YORK (TheStreet) -- The longer Europe puts up with the fantasy that a single currency is essential to its prosperity, the longer Italy, Spain, Greece and others will flirt with financial ruin and self-destruction. No bailout can save the Mediterranean economies from recurrent crises as long as they use the same currency as Germany and other northern states.

When the euro was established in 1999, prices, debts and bank accounts were converted according to market-determined exchange rates. For Italy, prices and obligations were converted according to the average value of the lire against other currencies in the eurozone and those adequately reflected the competitiveness of Italian workers and its exports.

Over the next decade, productivity grew faster in the north than among Mediterranean states owing to differences in culture, geography and economic policy -- importantly, not all of those are within the control of national governments.

If Mediterranean economies had their own currencies, their exchange rates against northern currencies would fall in value to maintain price and wage competitiveness and employment.

Locked into a single currency, prices in the Mediterranean region became too high across an increasing range of products. The north enjoyed trade surpluses with the south, and governments in Italy, Spain and Portugal increasingly borrowed to hold down unemployment. In Spain, a rush of real estate investment -- government policies encouraging home ownership, and northern Europeans seeking second homes and vacations in its sunny clime -- permitted its banks to do the borrowing instead of Madrid.

The U.S. economy has similar problems -- worker productivity is higher in New York than in Maine and much of the rural south. However, Washington contributes substantially to government programs that shore up employment and incomes in lagging areas -- Brussels lacks such fiscal authority. Workers migrate to jobs in more productive and prosperous locations more easily in the U.S. than the European Union, because they share a common language and culture, and similar educational systems.

States get into chronic fiscal difficulties -- for years it was New York, and now it is California -- but not the kind of trouble Italy and Greece have fashioned.

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