The current crisis of the European single currency was an accident waiting to happen. The adverse consequences of imposing a single currency on a disparate group of countries were initially hidden by the short-run advantages that the weakest countries enjoyed when they adopted the euro in 1999—and by the favorable global economic conditions that prevailed until 2008. But we now see very serious problems affecting both individual eurozone countries and the overall single currency system.
Many economists warned of these dangers even before the euro was adopted. (My own analysis, first published in the Economist in June 1992, predicted many of the problems that I will spell out here.) The euro’s political proponents did not understand the likely adverse economic consequences of its adoption, or even care about them. They wanted the single currency as a way of achieving stronger political cohesion in Europe, going beyond the free trade agreement of the European Union toward a full political union.
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