From Robert J. Samuelson at the Washington Post – Greece’s crisis could torpedo Europe’s recovery:
It was a mirage. The euro helped create the crisis and has made its resolution harder, as a new report from the International Monetary Fund shows. For starters, the euro fostered a credit bubble that led to booms in housing, borrowing and consumer spending. When each country had its own currency, the country’s central bank (its Federal Reserve) regulated local interest rates and credit conditions. With the euro, the European Central Bank (ECB) assumed that job. But one policy didn’t fit all: Interest rates suited to Germany and France were too low for “periphery” countries (Greece, Ireland, Portugal and Spain).
“Financial markets” — private investors — compounded the problem by assuming that the euro’s creation reduced risk. Weak countries would be protected by the strong. Money poured into the periphery countries. There was a huge compression of interest rates. In 1997, rates on 10-year Greek government bonds averaged 9.8 percent, compared with 5.7 percent for similar German bonds. By 2003, Greek bonds fetched 4.3 percent, just above the 4.1 percent of German bonds.
“The markets failed. All this would not have occurred if banks in Germany and France had not lent so much,” says economist Desmond Lachman of the American Enterprise Institute. “It was like the U.S. housing market.” Both American and European banks went overboard in relaxing credit standards.
Now that the credit bubble has burst, the euro impedes recovery. One way countries revive from financial crises is by depreciating their currencies. This makes exports and local tourism cheaper, creating some job gains that cushion the ill effects of austerity elsewhere. But latched to the euro, Greece and other vulnerable debtors forfeit this safety valve.