SANTIAGO – The jury is still out on whether Greece will manage to avoid default, remain in the eurozone, and reverse the brutal contraction of its economy. But any fair panel already would have issued a verdict on the political consequences of the common currency: utter failure.
Of course, the case for the euro was always political and came in two varieties: earthy and lofty.
The earthy case, seldom made clearly in polite company, was that the countries in southern Europe spent too much, taxed too little, and thus borrowed in excess. So long as they could finance deficits by printing a local currency and devaluing it from time to time, they would stick to their free-spending ways. Only the straightjacket of the euro and a monetary policy governed from Frankfurt could discipline them.
That was the theory. The practical result was precisely the opposite. With the risk of devaluation gone, interest-rate spreads dropped precipitously, and so did borrowing costs. Cheap money from abroad flooded into Europe's lower-income countries. In some places – Greece, Italy, and Portugal – the money financed an unsustainable public-spending binge. In others – Spain and Ireland – it financed the delusions of private real-estate developers. Debts ballooned everywhere.