Failed Discipline, Failed Reforms and Grexit: Why the Euro Failed
There is no substitute for the discipline of a market that cannot be manipulated by political elites.
It’s not that difficult to understand why the euro is doomed to fail. Given its structure, there is no other possible outcome but failure. Greece’s exit (Grexit) will simply be the first manifestation of the inevitable structural failure of the euro.
To understand why this is so, we have to start with two forms of discipline: the market and the state.The market disciplines its participants by discovering the price of not just goods and services but of currencies and the potential risks generated by fiscal and trade imbalances.
When nations issue their own sovereign currencies, the global foreign exchange (FX) market enforces an iron discipline on all participants. If a nation prints excessive quantities of its currency without boosting its production of goods and services by an equivalent amount, the FX market punishes this nation by devaluing its currency.
The market provides unwelcome feedback to the imbalances of interest rates, credit and currency: imports become prohibitive, nobody wants to buy the nation’s bonds unless the interest rate compensates for the higher risk, and so on.
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