SPIEGEL: What advice would you give Merkel and her counterparts? Should they tear the euro zone apart?
Rogoff: No, certainly not. We are talking about bending not breaking, with one or more periphery countries allowed to leave temporarily in order to enjoy greater flexibility. There is currently no simple solution for this unparalleled crisis. The big mistakes were made in the 1990s.
SPIEGEL: Does that mean the whole idea of the euro was a mistake?
Rogoff: No, a common currency for countries like Germany and France was a reasonable risk, given the political dividends. But it was a grave mistake to bring all the south European states into the euro zone purely for reasons of political union. Most of them were not ready for it economically.
SPIEGEL: That may well be, but the fact is that now they are part of the monetary union, and that can’t simply be unravelled.
Rogoff: Which is why there is only one alternative: Either the euro completely collapses — with all the catastrophic consequences that would entail — or the core members of the currency union manage to turn the euro zone into a genuine political union.
SPIEGEL: Europe has recently agreed on a fiscal compact committing all members to better budgetary discipline. Is that a step in the right direction?
Rogoff: Yes, but it will by no means suffice. All this treaty does is give the markets the temporary illusion that the problems have been solved for now. It has achieved nothing more than that.
SPIEGEL: What is needed instead?
Rogoff: What the monetary union needs more than anything is a central government, including a a finance minister, with significant tax and spending authority. The individual countries should also stop insisting on national control of banking regulation. That is a matter that should be dealt with exclusively at European level.
SPIEGEL: Do you honestly believe that the countries in the euro zone can bring themselves to hand over that much more power to Brussels?
Rogoff: The terrible thing is that few countries in Europe seem genuinely prepared for that. Those politicians who know what is needed keep quiet, fearing opposition from the voters. But the pressure of this crisis will create a momentum whose scope and impact we cannot yet imagine. At the end of the day, the United States of Europe may well come about a lot quicker than many would have thought.