The European Monetary Union is evolving like a slow-motion train-wreck these days. Just a few weeks ago, the pundits and bloggers began to ponder the possibility of the Euro failing, and now many are claiming that this is all but inevitable (the Economist provides a sobering assessment; an even more sobering assessment in the Financial Times).
So what should be done? I don’t know. I’m one of those stodgy, old-school economists who wouldn’t have recommended such a currency bloc in the first place (had I been around at the time). But no matter; just as it’s looking increasingly likely that the Euro will break down, it’s looking increasingly likely that the endgame will take the form of all previous fiat money failures: massive money printing undertaken in a last-ditch effort to save a doomed system.
Several voices have been calling on the European Central Bank to get on with the debt monetization already (i.e. buying government bonds with freshly-printed money) to keep the PIIGS governments solvent until their economies can “recover.” Now there are calls for the Federal Reserve to step in and do this job if the ECB won’t. As Ambrose Evans-Pritchard reports in the New York Times, some notable economists are practically begging the Fed to print $2 trillion (or more?) for the express purpose of buying European government bonds.
These economists are basically saying that printing massive amounts of money—whether Euros or Dollars—is the only tool left to save Europe. If by “save Europe” they mean bail out some of the most profligate social welfare states of all time by transforming their citizens’ fiscal pains into monetary pains for Americans, then sure, I guess this could count as “salvation.” But this will come with steep costs: further debauching the dollar, further depressing interest rates, further moral hazard-style incentives for the unrepentant debtor governments of the world to take just one more drink.
It will not end well, regardless of whether the ECB and/or the Fed monetize the debt, or countries endure a straight-up, old-fashioned default. Personally, I’d prefer the latter: it’s the morally right thing to do, it disciplines other tottering governments to get their fiscal act together (thereby avoiding more moral hazard), it prevents sovereign debt holders’ losses from being shifted onto savers and wage earners, and it avoids the economy-wide investment errors that interest rate manipulation and inflation are wont to bring about. But just to be safe, I’d prepare for the former… which reminds me, I need to get over to the coin shop.
Tyler Watts is an assistant professor of economics at Ball State University.