Cline offers the most detailed, data-rich, and policy-relevant analysis of the euro crisis yet to appear. Yet the interpretation he puts forward, although shared by many in the European financial and political establishments, is hardly uncontroversial. In Cline’s view, the euro system is in crisis primarily because some eurozone members have accumulated too much sovereign debt, and not because Europe suffers from insufficient demand, distorted exchange rates, or a lack of economic competitiveness. Cline argues that it would be disastrous for any country—even Greece, whose economic woes are currently dragging down the rest of the EU—to exit the eurozone because of the risk that investors would soon lose confidence in other countries. Thus, the EU’s current response represents the only feasible option: Greece should continue to receive some modest debt relief from creditors and the EU, and Greece and other indebted EU countries, including Ireland, Italy, and Portugal, should continue to run large fiscal surpluses indefinitely. Cline’s empirical analysis is impressive, but skeptics will note that his conclusions rest on two speculative assumptions: running perpetual surpluses will not stunt economic growth, and any withdrawal from the euro would be so costly as to make such threats not worth taking seriously. Recent events in Europe seem to be calling both of those assumptions into question.
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