"In particular I would highlight two key features which often seem to get ignored.
a) the impact of financial globalisation and what Carsten Valgreen calls the global financial accelerator on currency values. Virtually no one – not the USD or the UK pound sterling, or the Swedish Krona – can manage their currency valuation as they see fit, or devalue as they want. Currency parities are determined by complex interactive process which are by their very nature non linear in character.
Just look at the current valuation of the Japanese Yen and its impact on Japanese exports. It is impossible to understand much about current German policy thinking if you don’t get the fact that a principle constraint and line in the sand for Germany is not ending up being another Japan. The world of the 1990′s was not like this, and the simple rote argument of devaluation as the answer (which I myself use because while not being entirely right is not entirely wrong either) is not as straightforward as it seems, or as it once was. Hence the resistance in Brussels, Berlin and Paris to this panacea.
b) European societies are ageing rapidly, and this has implications. You will strain hard to find any reference to this phenomenon in the majority of commentaries offered on what to do about the Euro crisis, yet arguably the phenomenon of population ageing lies at the heart of the current debt crisis in developed economies. Impending health and pension liabilities are what makes so much sovereign debt unsustainable, and this is an issue which goes beyond the boundaries of the Euro Area, affecting countries like the US, the UK and Japan. Again, “the Euro is the root of all evil” argument fails to address this issue.
c) Finally we now have more than a decade’s experience of labour mobility from one European country to another, and in particular of migration patterns from periphery countries to the core. Among young qualified workers there is more mobility than many seem to imagine. I was in Latvia recently, which is a country not in the Euro but which is suffering population loss in such a way as to make its very continuity unsustainable in the longer run (you can find and download my presentation here). What I became convinced of during my visit there is that the fiscal union question is not only a Euro currency one. Simply having a single labour market in the context of generalised population ageing means that even non Euro countries will eventually need to participate in a common treasury due to the health and pension liabilities they are going to face.
Well, the LTROs have temporarily stabilised things, and made deposit movements from one country to another a much more containable evil. But this only offers some short term relief. Credit is still gridlocked all along the periphery, where the various countries are essentially entering long term depressions, with very high levels of unemployment, low economic growth and rising non performing loans in the financial sector. This is all unsustainable, but still, what could possibly be the trigger for disorderly break up?"
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