Martin Feldstein's Thoughts on the Euro

I've been a reader of Martin Feldstein's research since my graduate student days, when I recall a paper about an optimal two-part tariff, among others.  Over the years, he has produced lots of clear-headed thinking on economic policy as well.

In a recent Guardian blog, he talks about the economic benefits of a 20-25% devaluation of the euro on the competitiveness and trade balances of zombie and near-zombie states.

We've talked for more than two years about the structural incongruities among the EU members which always threatened the stability of a currency union, and Feldstein recognizes this too when he writes,

"Moreover, even under this optimistic scenario, the problem of the current account deficits of Italy, Spain, and the other peripheral countries will remain. Differences among the eurozone countries in growth rates of productivity and wages will continue to cause disparities in international competitiveness, resulting in trade and current account imbalances. Germany now has a current account surplus of about $215bn (£176bn) a year, while the rest of the eurozone is running a current-account deficit of about $140bn."

Feldstein notes that the euro should have devalued significantly already, thereby precipitating a sort of normalized adjustment process.  However, the ECB unlimited guarantee to buy Spanish and Italian debt has perpetuated the crisis by keeping the euro high to support markets.

Occasionally, the idea of Germany leaving the euro is put forward.  These writers argue that legally and administratively, it wouldn't be that difficult, since only contracts inside Germany would have to be redenominated into the German currency.  Everything else would remain in euros, although they would take a  
haircut according to where the devalued euro settled.  This is an intriguing idea, but it might not work either.

Who would be the "paymaster" of the smaller euro currency union?  France?  They would hardly want to accept this position, and they couldn't really handle it either. Italy?  Those who favor Germany leaving the euro suggest that the smaller euro currency area would be more likely to move to fiscal union.  I hardly think so.  The same issues remain, and the two biggest economies in the union would have their bluff called about giving up economic sovereignty over their budgets.  Interesting thoughts, but they hardly seem politically or economically feasible either.