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The Euro Beyond Greece: Getting Larger, Not Smaller

Everyone is looking at Greece, but that is not the real story for the future of the euro. The more important drama centers on Denmark. In the longer term, the Danes – who currently fight hard to preserve the krone/euro peg — have no alternative but to join the euro.

And this has important implications for two other persistent non-members of the single currency: Switzerland and the UK.

The Greek government may fail to square its heated rhetoric with the circle of cold reality that encompasses it, bring down its banking system and default upon its debts. But even then, the euro would remain the country’s de facto currency.

In such a crisis, the heterodox coalition led by far-left Syriza could not continue, precipitating new elections with new political groupings.

Greece is in the midst of a revolution to transform itself into a serious modern European country for which membership of the euro, and the concomitant exorbitant accumulation of debt, are merely the stage and backdrop, not the play itself.

It’s the exchange rate, stupid!

This would be a short-term disaster for the Greeks. But it would not derail reform efforts in other struggling peripheral euro members.

Indeed, the risks of “contagion,” if such exist, would be greater were Alexis Tsipras, the Greek prime minister, to win concrete rather than cosmetic concessions from his partners.

The control of debt was and is a vital part of the euro’s construction. But its fundamental raison d’ètre was, and is, the simple truth that in today’s world of freely flowing capital, which operates on a scale far exceeding actual commercial transactions, sharp exchange rate fluctuations are a serious disincentive to trade.

A true single market in the European Union must eventually have a single currency. If the exchange rate mechanism had worked generally, it would probably have been impossible to create the euro in 1999. The ERM did work for the Danes, as they had successfully maintained a peg with the D-mark for almost a generation.

Denmark’s fight

Now, the Danish National Bank is fighting to maintain the peg in what is left of the ERM, using euro intervention purchases, negative interest rates and the freezing of bill and bond auctions. But the end of this story is clear. The Danes will eventually have to join the single currency de jure, not just de facto.

The Danish crisis was triggered by last month’s decision by the Swiss National Bank to drop its peg against the euro. This exceptionally disruptive episode shows enormous uncertainty in Switzerland as to how to deal with the EU, and most specifically with the euro area.

It followed the contradictory outcomes of Swiss referendums on European rules on free movement of labor and on the composition of the nation’s foreign exchange reserves.

The Swiss franc has risen sharply against the euro, making a severe and sustained recession in the country unavoidable. This has implications, too, for the UK, with its chronic trade deficit, still inside the EU but contemplating leaving for some kind of Swiss-style detachment.

British monetary independence is increasingly illusory and is a major barrier to the essential export- and productivity-oriented rebalancing of the UK economy.

The Danes are paying a very high price in distorting their monetary policy so they can use a different colored euro banknote.

But further in the future, the Swiss and even the British will face comparable stresses dragging them towards the only sure solution for seeing off speculators and securing the stability they need: abolishing their respective exchange rates and joining the euro.

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