12/30/2011 12:01 EST | Updated 02/29/2012 05:12 EST

The Biggest Story of 2011 for Me? Europe's Currency Crisis


I know it's not very original, but I think the biggest news story of 2011 has been the currency crisis in Europe. For those who remember all the promise and fanfare around the idea of one government for all Europe, of which the new currency was the cornerstone, and the tremendous debates -- especially in Britain -- over how closely to integrate with the Eurofederalists, it is a remarkable debacle.

Among the more ambitious Euro-dreamers, especially those from the little countries who always saw a federal Europe as their way to positions of influence in the world, there was the hope for a united Europe, free from the Russian threat, able to cast off the gentle overlordship of the Americans and return to being the centre of the world as they had been a century ago, before the First World War swept that world away.

It was always a fable of course, as some of us warned, and it was compounded by a policy of not hearing, seeing, or speaking any evil about the European ideal that was bound to end in tears. The idea that debt issued by Greece would have the same elements of risk as debt issued by Germany, just because they were in the same currency, was insane and contradicted all laws and precedents of public finance: It's the issuer that is rated for the credit and the yield, not the currency.

The addiction of many of the Eurozone countries to excessive welfare, coupled with collapsed birthrates, assured that there would be too many people on benefit and not enough producing income and paying taxes in many of the countries. And some of the countries fluffed up their assets and papered over liabilities to be taken out of their soft currencies (drachmas, lire, pesetas, escudos) at overvalued rates of exchange.

The problem has been aggravated by the practice of imposing hair-shirted deflationary policies on the wrongdoers, which just increases the deficit (except for the Irish who are incentivizing investment and growing out of the problem); and by the unbidden Mephistophelean advice of the U.S. administration to throw money out of the windows, increase the money supply, and inflate the currency. Germany, to its credit, will not allow that.

It should be possible to let the weaker countries default, make the best deal they can with their bond holders, and stay in the Euro. Meanwhile, Germany can back the private banking sector that is exposed to bad sovereign loans, in exchange for reforms that reform entitlements, encourage investment, and ensure labour market flexibility. But it is a tense and intricate struggle that will carry well into the new year.

The Euro-dreamers will not be heard from again for a long time.