Resident Fellow Desmond Lachman

Sir, Wolfgang Münchau seems to be very wide of the mark in asserting that the present global financial crisis will lead to the early expansion of the eurozone ("Now they see the benefits of the eurozone," November 3). For, as the marked widening in interest rate spreads on Italian and Spanish government bonds would suggest, the more pressing question raised by the crisis is not so much whether the eurozone will expand but rather whether or not the euro can survive in its present form.

In 1998, when the euro was launched, Milton Friedman famously warned that the euro would be truly tested by the first major global economic recession. He issued this warning in the belief that, lacking labour and product market flexibility, Europe was not an optimum currency area in the sense that was the case of the U.S. economy.

Judging by October's alarming plunge in global equity prices and the virtual freezing up in global credit markets, there can be little doubt that Europe, along with the United States, is at the start of its worst economic recession in the postwar period. And judging by the bursting of Spain's outsized housing market bubble and by the precarious state of Italy's public finances, there can be little doubt that Spain and Italy will be the two major European economies that will be put to the severest of tests as the global recession deepens.

For in order to cope with their respective problems, Spain and Italy will need low interest rates and weak currencies that continued euro membership clearly precludes.

While Spain and Italy's travails pose the most serious threat to the euro's survival in the longer run, Europe is faced with the more immediate challenge of stemming the financial market contagion that threatens its highly vulnerable eastern periphery.

One would have thought that, in the context of a severe global recession, market participants must be expected to become increasingly worried that substantial currency weakness in east Europe will make it very difficult for those countries to meet the Maastricht criteria for full eurozone membership any time soon.

Desmond Lachman is a resident fellow at AEI.