So, what does happen to the euro if Italy continues it’s decades long no economic growth, something rather caused by the inability to have the correct monetary policy for that economy? As with the Spanish and Irish property booms, the desperate slumps there and elsewhere when monetary policy was again inappropriate for the varied economies?
ECB heading for 'Titanic iceberg' as Italy crumbles and eurozone slows to five-year low
That might be a little dramatic as a mental image but there’s an underlying truth there. As Herb Stein pointed out, things that can’t go on forever won’t.
The euro is, by definition, the imposition of a single monetary policy upon the varied economies of the eurozone. We can mutter about benefits of such but there are also costs to it. This is what the subject of optimal currency areas is all about. That the peoples of one village use the same currency to transact has obvious benefits, subjecting the entire world to one monetary policy has equally obvious costs. Where’s the sweet spot inbetween?
Obviously, we can all argue about where the euro is on that spectrum. But we’re interested in a rather deeper point.
Marx told us that capitalism would fail because of its own internal contradictions. We’re, to be mild, unconvinced of this. But we do agree that many socio-economic systems do indeed fail for exactly this reason or reasons. The Latin Monetary Union perhaps, the gold standard if you like, the Soviet ruble post there being no Soviet nor Union and so on.
The unifying factor behind those failed systems appearing to us to be when constraints are placed upon that capitalism and free markets. That being what fails, those internal contradictions. When the law, or “the system” imposes too binding a set of constraints upon economic activity then it will be the law, or the system, that eventually breaks.
That is, it’s not capitalism that falls over, it’s those attempts to constrain it too rigidly.
We’d hesitate to insist that this is a law or anything, just an observation. Human behaviour will out and if the State or bureaucratic constraints upon it cannot go on for ever then they won’t.