Here it comes... Markets are going up and down, not knowing if euroland is falling apart or not. "Scheitert der Euro, scheitert Europa", warns Angela Merkel, Chancellor of Germany. Other EU leaders echoes this message, declaring that the eurozone crisis is not to be blamed on the euro but on certain countries, foremost Greece and Italy, having taken on too much debt. But this analysis is wrong. The cause of the crisis is the common currency, the euro. It would be a blessing if the euro were to be replaced with freely floating national currencies. Exchange rates would then be adjusted to reflect each country's competitiveness, which would give a country like Greece a chance to recover. The euro system is very rigid, leaving individual countries without the protection of a national currency and interest rates fitting the country's economic situation. The euro experiment might very well result in a European depression if the euro leaders don't change course and give it up.
The weaker eurozone countries basically walked into a trap when they joined the euro. That's the conclusion of several studies by economists, for example Kash Mansori. Euro adoption encouraged capital to flow into these countries, but when those capital flows came to a sudden stop, and lending rates skyrocketed, they were caught in the trap. This is an inherent weakness in the euro system. Individual countries have no means to deal with an overheated economy, or its opposite, without their own currency and their own interest rate policy. What's left in the present situation is to hit the people directly with tax increases, spending cuts, cuts in wages and finally unemployment.
The way out of this mess is to scrap the euro and reintroduce national currencies. That's no disaster; that's to save Europe.