Very comprehensive & insightful:
The Misconstruction of the Euro
In the eurozone, there are fiscally independent sovereign governments coexisting with one (central) banking system. This is a unique construction as normally there is one government with its own banking system.
Governments can finance their deficits through the banking system and money creation. When governments spend more than they receive in tax revenues, they typically issue government bonds. The financial system buys an important part of these bonds by creating new money. Banks purchase these bonds because they can use them as collateral for new loans from the European Central Bank (more precisely the European System of Central Banks).
New money flows to governments that monetize their deficits indirectly. The cost of the indirect monetization is born by all users of the currency in the form of a reduced purchasing power, i.e., inflation. If there is one government per central-banking system, the whole nation bears the cost of the deficit monetization. However there are in the eurozone several governments running their own budgets.
Imagine that all governments but one have a balanced budget. The one deficit government can then externalize onto other nations part of the costs of its deficit in the form of higher prices. This monetary redistribution is the already-existing transfer union in the EU.
A government like the Greeks’, with high deficits, prints government bonds bought and monetized by the banking system. As a consequence, there is a tendency for prices to rise throughout the monetary union. The higher the deficit of a government in relation to the deficits of other countries, the more effectively it can externalize the costs of a deficit. The incentives of this setup are explosive as governments benefit from deficits higher than those of their eurozone neighbors.
The Stability and Growth Pact designed to contain these incentives utterly failed because governments themselves judge whether sanctions are imposed on them.
. . . .
The EMU provokes conflicts between otherwise peacefully cooperating nations. Redistribution is always a potential cause of social stress. The monetary redistribution in the EMU was not understood by the bulk of the population and, thus, did not cause conflicts. The bailouts, the rescue fund, and the interventions of the ECB that were ultimately caused by the setup of the EMU have made the redistribution between countries more obvious.
Murphy, Robert P.
Germans do not like maintaining the Greek welfare state. In the German media Greeks are called “liars” and “lazy.” The Greek media, in turn, demanded reparations for World War II. While the Germans do not like paying for the periphery, people in peripheral countries blame Germans for austerity measures. They feel that the unpopular measures are imposed on them by foreign (German) pressure. Within the EMU, these clashes and conflicts will continue and probably increase. Remaining in the EMU implies living in such an atmosphere and the risk of escalation.
To make an understatement, the costs of the Eurosystem are high. They include an inflationary, self-destructing monetary system, a shot in the arm for governments, growing welfare states, falling competitiveness, bailouts, subsidies, transfers, moral hazard, conflicts between nations, centralization, and in general a loss of liberty. In addition, these costs and risks are rising day by day. Considering all this, the project of the euro is not worth saving. The sooner it ends, the better. Alternatives exists. A return to sound money such as the gold standard would boost responsibility, harmony, and wealth creation in Europe. (Read more)