While the financial crisis continues to shake Europe, some economists are beginning to tout a miracle remedy: divide up the Eurozone to allow countries in difficulty, led by Greece, to reap the benefits of a devalued currency. Could the Eurozone be saved by a split? While all efforts remain focused on preserving regional unity, European elites are now pondering the question. Can we still hope for a happy ending?

“Leave the euro to the PIGS!” is the rather provocative advice American economist, Allan Meltzer, has offered to European political leaders. “Europeans keep throwing money at problems and insisting on short-term palliatives,” he noted sternly in the Wall Street Journal. “Europe’s responsible countries should establish their own new currency union.” A union limited, in Meltzer’s view, to those who adopt binding communal fiscal restraints. The new currency could float against the euro, allowing the European currency to be devalued and offering countries in difficulty – Greece, most obviously, but also Italy, Spain and Portugal – an increased ability to compete.

On the other side of the Atlantic, observers had not waited for Meltzer’s directive to start thinking about a multi-tier Eurozone. At the end of 2011, reports surfaced of “intense” discussions between France and Germany about resizing the Eurozone. “We need to move very cautiously, but the truth is that we need to establish exactly the list of those who don’t want to be part of the club and those who simply cannot be part,” a senior European official, who preferred to remain anonymous, explained. European Commissioner for Economic and Monetary Affairs, Olli Rehn, immediately responded with an emphatic denial. “If the final goal is to safeguard the stability of the Eurozone, it is obvious that a fragmentation does not serve this objective,” reiterated his spokesperson. “Every proposal must be based on preserving the unity of the Eurozone.”

In the minds of the euro’s architects, however, the subject is no longer taboo. Otmar Issing, a highly respected former Chief Economist of the European Central Bank, has already caused a sensation by suggesting the Eurozone might only be saved at the cost of resizing. “Everything speaks in favor of saving the euro area,” he declared. “How many countries will be able to be part of it in the long term remains to be seen.” More categorically still, former President of the Federation of German Industry, Hans-Olaf Henkel, has urged Germany, Austria, Finland and the Netherlands to form their own monetary union. Concrete projects have even circulated publicly via the media – for instance, Markus Kerber’s ‘Guldenmark’. Kerber, a professor at Berlin’s Technical University, proposes authorizing countries that demonstrate a surplus in their balance of payments to introduce a parallel currency.

It would be an understatement to say the idea of a multitiered Eurozone has inflamed the German academic world in the last year. The issue has inspired some of the country’s most prominent economists, such as the President of the Ifo Institute in Munich, Hans-Werner Sinn, who, together with Friedrich Sell, suggests transforming the Eurozone into an “open monetary union.” The countries risking expulsion from the European monetary zone would be offered associate membership status, allowing them to adopt their own currency provisionally, but with the option to rejoin the Eurozone at a later date. “Countries would not be expelled from the club; their full membership would simply lie dormant for a couple of years,” explained Sinn and Sell in the Financial Times. “That would be a significant psychological factor making governments, and their electorates, more willing to persevere with painful economic reforms.”

To read the full report, subscribe or order a copy of The Global Journal.

by Guillaume Meyer