Reluctance to move on from the euro

EUROPEAN Monetary Union (EMU) was never a good idea. I remember my surprise when, as a young assistant professor, I realised that I was opposed to the Maastricht Treaty. I believed then - and still do - that European integration is a very good thing. But the textbook economics I was teaching showed how damaging EMU could be in the absence of European fiscal and political union.

Nothing that has happened since has convinced me that the textbook was excessively pessimistic; on the contrary, it was far too optimistic. Life is strewn with banana skins, and when you step on one you need to be able to adjust. But the monetary union itself turned out to be a gigantic banana skin, inducing capital flows that pushed up costs around the European periphery. And adjustment - that is, currency devaluation - was not an option.

Furthermore, most textbooks of the time ignored the financial sector. Thus they ignored the fact that capital flows to the periphery would be channelled via banks, and that when the capital stopped flowing, bank crises would strain peripheral members' public finances. This, in turn, would further erode banks' balance sheets and constrain credit creation - the sovereign-bank doom loop that we have heard so much about in recent years. And no textbooks predicted that European cooperation would impose pro-cyclical austerity on crisis-struck countries, creating depressions that in some cases have rivalled those of the 1930s.