The man who predicted the European debt crisis

http://www.washingtonpost.com/opinions/the-man-who-predicted-the-european-debt-crisis/2011/12/12/gIQAN1geqO_story.html

Europe’s politicians are making a hash out of the once-proud project of United Europe, and, in the process, making a prophet out of Martin Feldstein.

In 1997, before the first euro note had rolled off the presses, the Harvard economist surveyed Europe’s plans for a single currency and, in a lengthy essay in Foreign Affairs, predicted that they would come to grief.

Like many of his colleagues, Feldstein doubted the single currency’s economic viability absent political and fiscal union.

What Feldstein saw with special clarity, though, was the disaster that would ensue even — or perhaps especially — if Europe tried to increase political and fiscal union for the sake of monetary union.

As Feldstein wrote: “A political union of European nations is conceived of as a way of reducing the risk of another intra-European war among the individual nation-states. But the attempt to manage a monetary union and the subsequent development of a political union are more likely to have the opposite effect. Instead of increasing intra-European harmony and global peace, the shift to [monetary union] and the political integration that would follow it would be more likely to lead to increased conflicts within Europe and between Europe and the United States.”

Feldstein foresaw that the trigger for political tension would be a sharp economic downturn, imposing different levels of unemployment on different members of the monetary union, because high-unemployment countries could not recover their competitiveness through currency devaluation.