The Euro: Bad Idea, Poorly Executed, Hard to Fix

By David Backus, Heinz Riehl Professorship in Finance and Economics and Department of Economics Chair and Kim Schoenholtz, Professor of Management Practice and Director of the Center for Global Economy and Business

Even if the system holds together for a time, the cost is likely to be an extended period of poor economic performance.

When the Norwegian Nobel Committee awarded the 2012 Peace Prize to the European Union (EU), they cited advances in "peace, democracy, and human rights." The common currency zone we call the Euro Area isn't mentioned, unless it's implied by the phrase "grave economic difficulties."

If the EU has been a success, the European Monetary Union (EMU) is revealing itself to be the opposite. One might argue that the euro was a mistake from the start, that the history of fixed exchange systems is littered with failure. We have some sympathy with that view, but we'd like to make two different points. First, flaws in the design and implementation of the EMU have made the crisis worse. Second, the decentralized decision-making process of the EU, with political power concentrated in countries rather than Europe, makes effective crisis management nearly impossible.

The euro crisis combines, in our view, a sovereign debt crisis and a banking crisis, with mutually adverse feedback between the two. But design flaws in the system magnified their impact and feedback.

Read the full article as published in The Huffington Post.