Pity Mario Draghi, the president of the European Central Bank. Even without having to endure constant sniping from finance ministers in the eurozone, maintaining a currency union among such diverse countries would be no easy task. Happily, several factors could help the eurozone to smooth out its differences in business cycles and economic prospects over the long term. Frustratingly, it refuses to use any of them.
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In general, currency unions are three-legged stools, supported by fiscal policy, migration, and trade. From the beginning, in a feat of late 20th-century European design aesthetics, the eurozone was intended to have only the last two legs. Neither of them was particularly strong, however, and their weakness has made an initially challenging situation even more precarious.
To understand why, consider the basic setup. The members of a currency union don't just use the same money; they also cede all the power to make monetary policy to a single authority, in this case the European Central Bank. The ECB has a tough job, since it has to decide on one level of short-term interest rates for the 17 members of the eurozone. That can be practically impossible in times like these, when some countries are booming while others are in recession.
With the passage of years, the euro itself was supposed to make this job easier. In theory, trade between the members would help to synchronize their economies. The idea was that their companies and consumers would be so intertwined that they would all rise and fall on the same economic wave, with similar trends in employment and inflation.
This may seem paradoxical, since trade works best as an economic stabilizer when exchange rates can move freely. A country in a downturn typically sees the value of its currency fall as investors demand fewer of its securities, and so its exports become more attractive abroad. In the eurozone, this isn't possible.
But trade still has a role to play. When some euro members are struggling -- and especially when their governments are having a hard time making ends meet -- the others can try to export some growth by stimulating their own economies. In other words, Germany -- Europe's economic engine -- could funnel extra money to its consumers through tax cuts or spending increases in hopes that they would buy more goods and services from Greece, Portugal, and Spain. This isn't the most direct way to support the laggards, but it could be more politically attractive than just giving them money. After all, domestic consumers get to choose how they'll spend the extra cash.
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