Puerto Rico's economy is struggling and its business leaders worry that tax reform will make things worse. (AP Photo/Ricardo Arduengo)
(AP Photo/Ricardo Arduengo)

Its economy has been shrinking for years, its debts have been piling up for even longer, and its government has finally admitted that even brutal tax hikes and spending cuts wouldn't be enough for it to pay back everything it owes.

I'm talking, of course, about Puerto Rico. Its governor, Alejandro García Padilla, admitted to the New York Times on Sunday that the island is going to have restructure its $72 billion in debt that is "not payable." Now, if it sounds like you've been hearing some variation of this story for years now, it's because you have—just about Greece. It also borrowed too much, was forced into self-defeating austerity as a result, and would arguably have been better off using its own currency rather than the one its much bigger neighbors do.

But despite these similarities, there's still a big difference between two. Greece's banks have had to close due to the panic that their euros might get turned into drachmas that wouldn't be worth anywhere near as much, while Puerto Rico's banks are fine since people know their dollars are going to stay dollars. And this, more than anything else, shows us what it takes to create a well-functioning currency union.

Now, we normally don't think of the U.S. as the "dollar zone" like Europe has the euro zone, but that's really what it is. Cities and states that, economically-speaking, are big enough to have their own currencies share a single one instead—and, more importantly, a single monetary policy, too. The problem, though, is that different parts of the country have different economic needs. Alabama, for example, might want interest rates to be lower at the same time that Massachusetts wants them higher. Or Florida might, to come up with a crazy hypothetical, have a housing crash that makes it want to devalue the dollar to regain competitiveness, while the rest of the country doesn't.

So how do we stop one state from getting stuck in a never-ending slump and another in an inflationary spiral? Well, we need some escape valves. The first is making it easy for people to move from where there aren't jobs to where there are. In practice, that means everyone has to speak the same language and share enough of the same culture that they're willing to do so. The second is having the federal government provide a safety net—food stamps, unemployment insurance, Social Security, and Medicare—so individual states that are required to balance their budgets won't have to cut this help right when it's needed the most. And the third is having the federal government guarantee bank deposits, so people know their money is safe no matter how much trouble their state gets into.

But as Puerto Rico shows, even all this isn't enough to make the fundamentals of your economy strong if they're not. What it does do, though, is keep your people's living standards from falling too much. And those would have dropped a good bit more when you consider the fact that Puerto Rico has basically been in a recession since 2006. That's when a tax break for manufacturers that set up shop on the island went away, and so did all the jobs they brought. Puerto Rico was soon stuck in a vicious circle where the bad economy made people move to the mainland in search of work, the shrinking population left the government with a shrinking tax base to pay for the same amount of spending, and, after borrowing to cover this up, they eventually had to try to close their budget hole with austerity measures—which only made the economy even worse and made even more people leave. In total, Puerto Rico lost 5.5 percent of its population between 2005 and 2013.

Notice, though, what's missing from this tale of fiscal woe. There haven't been any bank runs in Puerto Rico. Its banks are still open and people can still take out as much money as they want. And there's no question that no matter what happens with the government's debt restructuring—which won't be easy, since, as a U.S. territory and not a city, it can't go through Chapter 9 bankruptcy—that Puerto Ricans' bank deposits are safe.

None of this is true in Greece. The problem is the euro zone doesn't have an equivalent of the FDIC. Each country is responsible for bailing out its own banks. But this creates a doom loop where weak banks can drag down a weak government or a weak government can drag down weak banks. The latter is what's happened in Greece. Its government is broke and that's made its banks broke too, since they hold a lot of government-guaranteed assets that might not be worth much anymore. That only leaves two ways to get the banks the money they need: take it from depositors or print it. But Greece can't print money as long as it's part of the euro—only the ECB can do that—so it'd have to leave the common currency to do this. Then, and only then, could it print all the drachmas it needed to fill the hole in its banks' balance sheets. In either case, though, people would lose a lot of their savings, whether their deposits were directly taxed or indirectly so with devaluation. That's why there's been so much panic in Greece, which, after the ECB refused to help, left Greece's government no choice but to close its banks to save them.

So a poorly designed currency union is really a doomsday device for turning fiscal crises into financial ones. Think about it like this. If Puerto Rico's debt negotiations go badly, the worst that would happen to the dollar zone is that cities and states might have to start paying higher borrowing costs. That's it. Markets wouldn't worry that Puerto Rico might have to ditch the dollar and create a new currency, or that, say, Illinois might either. The island's debt crisis wouldn't turn into a banking crisis, because the federal government wouldn't let it. But if Greece goes bust, the consequences could be much more catastrophic for the euro zone. Greece really might need to leave the common currency and bring back the drachma if its banks run out of cash—which  is a real possibility given that, according to one report, they're down to their last 500 million euros. And in spite of the fact that the ECB has put a financial firewall in place that should keep the panic from spreading to other countries, there's a chance it wouldn't work. Even if it did, though, it would still set the precedent that the euro was not, in fact, irreversible—the ECB actually admitted as much—and could start another crisis if and when another anti-austerity party wins power, like in Spain.

In other words, a currency union doesn't work if you're allowed to run out of the currency. How do you do that? Easy: if you can't afford to bail out your banks, and nobody else will either. That's what is happening to Greece now, and it's what could happen to any other euro zone country as long as there's no central bailout fund. There's supposed to be one starting in 2016 that would help national governments guarantee deposits up to 100,000 euros, but there's still some question about how much firepower it will have then. It's supposed to take ten years for it to get 55 billion euros in funds. So until then, if you have a banking crisis, better hope it's not a big one.

Greece and Puerto Rico both borrowed more than they could pay back, both are stuck in deep recessions, but both aren't at risk of getting forced out of their currency unions. Only Greece is. That's because the euro zone doesn't have a banking union yet, so a debt crisis can morph into a financial crisis and then a currency crisis. The lesson is that if your money isn't safe, then your currency isn't either. It's why a banking union is the most important part of a currency union. The fact that the euro zone has existed for 16 years and this is only getting fixed now shows you how ill-conceived the common currency was. Europe is trying not to let this crisis go to waste by using it to justify doing what it should have done a long time, but but don't forget how high the cost has been in the meantime.

Greece would love if its debt crisis were just a debt crisis like Puerto Rico's. But it's not. It's an existential one.