It seems that the Euro countries are living in denial. Surely some of them – Portugal, Ireland, Greece, Spain (PIGS) are going to have to give up the Euro within the next couple of years. Politicians insist that there is no legal mechanism to exit the Euro but according to Charles Calomiris – a Professor at Columbia Business School – the collapse of the Euro is simple arithmetic. When a country has a debt-to-GDP ratio high enough, it becomes impossible for it to generate enough future taxes to repay its existing debt and interest costs. The only alternative for countries in the above condition is to default on their euro-denominated debt and exit the Euro. Then they can finance their fiscal deficits by printing their own currency.
The challenge today is to plan for a sustainable currency union in the future, once exiting countries reform themselves enough to rejoin. It is imperative that the Eurozone countries agree on measures to prevent massive deficits. One of the reasons that Italy and Greece spent so much is that their interest rates fell dramatically when they joined the Eurozone, making deficit finance more attractive. The too-big-too-fail problem is both dangerous and avoidable – better to let the banks fail. Politicians today are frightened of transparency in the recognition of bank losses and are often unwilling to close insolvent banks losses