Eurozone problem addict? It doesn’t get better than top US economist Martin Feldstein, who has the great advantage of having said right from the start that the project as conceived was unworkable if not dangerous.

Here he is explaining in brisk terms what went wrong, before moving on to say what could and should happen next:

Single currencies require all the countries in the monetary union to have the same monetary policy and the same basic interest rate, with interest rates differing among borrowers only due to perceived differences in credit risk. A single currency also means a fixed exchange rate within the monetary union and the same exchange rate relative to all other currencies, even when individual countries in the monetary union would benefit from changes in relative values.

Economists explained that the euro would therefore lead to greater fluctuations in output and employment, a much slower adjustment to declines in aggregate demand, and persistent trade imbalances between Europe and the rest of the world. Indeed, all these negative outcomes have occurred in recent years.

Here is why: when a county has its own monetary policy, it can respond to a decline in demand by lowering interest rates to stimulate economic activity. But the ECB must make monetary policy based on the overall condition of all the countries in the monetary union.

This creates a situation in which interest rates are too high in those countries with rising unemployment and too low in those countries with rapidly rising wages. And because of the large size of the German economy relative to others in Europe, the ECB’s monetary policy must give greater weight to conditions in Germany in its decisions than it gives to conditions in other countries…

Before the monetary union was put in place, large fiscal deficits generally led to higher interest rates or declining exchange rates. These market signals acted as an automatic warning for countries to reduce their borrowing. The monetary union eliminated those market signals and precluded the higher cost of funds that would otherwise have limited household borrowing. The result was that countries borrowed too much and banks loaned too much on overpriced housing…

Powerful, smart, authoritative. Read the whole thing, before it vanishes behind a paywall in February…