Toward a Workable Solution for the Eurozone

Although it didn't originate with an economist, the malaprop "It's deja vu all over again" is invariably what springs to mind in the aftermath of virtually any euro summit of the past few years, all of which seem to end with the requisite promise of a so-called "final solution" to the problems posed by the increasingly problematic currency union. But it's hard to get excited about any of the "solutions" on offer, since they steadfastly refuse to acknowledge that the eurozone's problem is fundamentally one of flawed financial architecture. Today's crisis has arisen because the creation of the euro has robbed nations of their sovereign ability to engage in a fiscal counterresponse against sudden external demand shocks of the kind we experienced in 2008. And it is being exacerbated by the ongoing reluctance of the European Union, European Central Bank, and International Monetary Fund--the "troika"--to abandon fiscal austerity as a quid pro quo for backstopping these nations' bonds.