That is why I believe that these countries and the eurozone more generally would benefit from euro depreciation. Although a weaker euro would not increase their competitiveness relative to Germany and other eurozone countries, it would improve their competitiveness relative to all non eurozone countries.

Some 90 of the refinancing debt that the commercial banks of the GIPS countries (Greece, Ireland, Portugal, and Spain) hold with their respective national central banks served to purchase a net inflow of goods and assets from other eurozone countries. Two thirds of all refinancing loans within the eurozone were granted within the GIPS countries, despite the fact that these countries account for only 18 of eurozone GDP.

Ever since the eurozone was established, its members have issued official fiscal forecasts that are systematically biased in the optimistic direction. Other countries do this, too, but the bias among eurozone countries is, if anything, even worse than it is elsewhere.

Some eurozone countries borrowed excessively and have been punished by the markets, perhaps deservedly so, while others, in the resulting climate of anxiety, have become targets for speculators. On July 21, eurozone leaders agreed to make more extensive use of the new European Financial Stability Facility (EFSF) by permitting it to purchase endangered eurozone countries debt in secondary markets.

But allowing Greece to default and still remain in the eurozone is not an option it would signal that other eurozone countries could amass huge debts, funded by the ECB, without having any intention of repaying. Fiscal responsibility in the eurozone would be fatally undermined.

No wonder that fringe political movements are gaining traction throughout the eurozone. And no wonder that voters in almost two thirds of eurozone countries have turned out the incumbents in their most recent elections.

But, if one considers what might underlie capital movements of this sort, suspicion must also fall on unsustainable policies that extend to countries well outside the eurozone. In the wider European Union, countries like the United Kingdom or Hungary are as much afflicted by structural deficiencies as some peripheral eurozone countries are.

One could argue that the euro has been and still is overvalued, and that this has hindered many eurozone economies productivity relative to non eurozone countries. But the relative productivity deficiencies within the eurozone are more important for growth, and have nothing to do with the exchange rate.

To be sure, central bank intervention is not the only way to quell self fulfilling crises in the eurozone. Fiscal transfers, whereby eurozone countries commit to provide funds to their distressed counterparts, could also work.

Scotching the Eurozone

Demokratisasi di Eurozone

Optimizing the Eurozone

Poland s Eurozone Tests

Rebalancing the Eurozone

Implementing this idea also implies embracing a new concept of sovereignty, given the complex interdependence that exists between eurozone countries. But it is ultimately in the interests of all eurozone citizens that these changes be made.

The credit ratings agency Standard amp Poor s has just downgraded the sovereign debt ratings of nine eurozone countries, including France.

One way to overcome the dilemma might be to articulate an institutional future in which there would be essentially just two types of countries within the EU and the single market those in the eurozone and those with national currencies. There would have to be two sets of EU institutions, one for the eurozone and another for non eurozone countries, although they would overlap.

Sustaining the Unsustainable Eurozone

Alexander Hamilton s Eurozone Tour

Down with the Eurozone

London vs. the Eurozone

These economic adjustments could occur much more smoothly if the eurozone as a whole were to pursue a more expansionary policy. If the target inflation rate for the eurozone were to be set temporarily at, say 3.5 , and if the countries with current account surpluses encouraged domestic inflation rates somewhat above the eurozone s target, there could be real price adjustment within the eurozone without price deflation in the troubled countries.

But the EU budget has already enabled an indirect form of leveraging the European Commission s use of implicit budget guarantees to raise capital on financial markets. These funds are used to provide financial assistance to non eurozone EU countries through the Medium Term Financial Assistance Facility, to eurozone countries through the now expired European Financial Stabilization Mechanism, and to partner third countries.

It is true that rebalancing competitiveness within the eurozone has not yet been completed, and that some countries thus need to record below average inflation to cut above average costs. But this is not true of the eurozone as a whole.

The eurozone needs a banking union a European deposit insurance scheme in order to stem capital flight, a European source for financing bank recapitalization, and eurozone wide supervision and regulation. The heavily indebted countries need relief on their financing costs.

The Government the Eurozone Deserves

Eurozone Budgets Under the Spotlight

Growing Up in the Eurozone

Decision Time for the Eurozone

Golden Rules for the Eurozone

Judgment Day for the Eurozone

The Emerging Economies Eurozone Crisis

Such radical changes would require the consent of all eurozone countries. And the Bundestag (not Standard and Poor s) would have to be happy.

First, eurozone countries must implement reforms aimed at boosting wage and price flexibility through enhanced competition and improved labor and capital mobility within and between member countries. Second, wealth transfers to peripheral countries, while controversial, are necessary.

The key to resolving the eurozone crisis lies in properly structured reforms in the ailing countries. Indeed, experience shows that there is no substitute.

Signs of Life in the Eurozone

Will Vladimir Putin Bolster the Eurozone?

A Standby Program for the Eurozone

A Survival Strategy for the Eurozone

A Breach in the Eurozone Dike

If southern eurozone countries followed the route of forging a new social deal, they would have to ensure that it ultimately intersects with the paths of the northern European members. While all eurozone countries do not have to converge on a single model, their interdependence means that a pan European social and economic settlement is needed.

No one doubts that Germany and most other eurozone members would prefer the single currency to continue. Today s uncertainty concerns whether this preference may be overridden by pressing considerations of national politics, or resentment at the slow pace of reform in certain eurozone countries.

The only way to stem the erosion is to take determined action that convinces financial markets that the eurozone is here to stay. A debt pooling scheme that satisfies the requirements outlined here would signal that the eurozone member countries are serious about sticking together.

Without external constraints, public and private expenditure grew precipitously in many countries on the eurozone periphery, while wages rose faster than productivity. As these countries posted current account deficits, northern European countries accumulated current account surpluses, exposing a widening competitiveness gap.

A New Approach to Eurozone Sovereign Debt