First, Professor Joffe asserts that the introduction of a common European currency was politically rather than economically motivated, pursued on the basis that it would protect Germany's strong export-oriented economy and ensure monetary discipline throughout the Euro zone without the need for heavy political management. However, good political intentions were not enough, and a disregard for sound economic principles has led to the current crisis.
In discussing causes of the crisis, Professor Joffe cites high spending and rapidly growing labor costs in the Mediterranean countries. A common currency gave an impression to lenders of equal risk between Euro zone countries, who had little incentive for responsible monetary policies when they could borrow cheaply. Although northern countries like France and Germany also violated deficit rules prior to the crisis, they were better able to "devalue from within," cutting costs and wages, and lengthening work weeks to control unemployment. Professor Joffe uses the analogy of a steam-powered train to illustrate the challenges of the monetary union: each country represents a train car, and to move together there are three options - 1) drivers can impose discipline on other cars to ensure they don't burn too much coal; 2) when one car runs out of coal, others can share their resources; or 3) the cars can break apart, forcing out those who don't follow the speed limit.
Professor Joffe then offers several insights for the future. He reflects that the dominant system in the EU lately has been a “transfer union” (option #2 in the above train analogy). He predicts that this system will likely prevent a default until at least Spring 2012. While the crisis suggests that the monetary union should not have been forced, Joffe asserts that the desire to save the Euro is universal and a complete collapse is unimaginable. In conclusion, Professor Joffe discusses the different political challenges facing Europe and the United States, and cites several encouraging factors, including that democracy remains stable even during the economic crisis.
A discussion session following the talk address issues such as: the potential for the continued political integration of Europe to force less disciplined countries to "shape up"; how the EU hierarchy may change after the crisis; Ireland's role in the crisis; the validity of proposals to strengthen the European Parliament and implement a transactions tax; the potential for an "Arab Spring" uprising among Greek youth; and prospects for transatlantic relations.