Everyone is looking with horror at Europe, waiting for the European Economic and Monetary Union to break up and for the PIIGS to start dropping like flies, taking the rest of the euro zone and the global economy with them. Unlikely!

European monetary union was a great experiment that made a lot of sense on paper. Europe, which had roughly the same size population and economy as the U.S., was at a competitive disadvantage, as dozens of currencies embedded extra transaction costs in cross-border trade and each currency separately had little chance to compete with the U.S. dollar for reserve currency status. Germany — the largest country in Europe and one of the world’s biggest exporters — was at a disadvantage too: The strong deutsche mark made its products more expensive and less competitive in the rest of Europe

There were also no-less-important noneconomic considerations. Germans were haunted by their past; they had started two world wars in the 20th century, and a united Europe was their way of lowering the chances of future European wars.

EMU sounded like a very logical marriage of all the significant powers of post–World War II Europe. But the arrangement was never really a marriage; it was more like a civil union. EMU members combined their currencies into one, the euro. They agreed to use the same central bank and thus implicitly guaranteed one another’s debts. They signed treaties that spelled out the rules of the union (the prenup), but unlike most prenups, in which the rules of divorce are spelled out, the EMU did not determine what would happen if a member fell upon financial hard times.

....