Saturday, May 8, 2010

Joseph Stiglitz on the Euro

Excerpt :

“The Greek financial crisis has put the very survival of the euro at stake. At the euro’s creation, many worried about its long-run viability. When everything went well, these worries were forgotten. But the question of how adjustments would be made if part of the eurozone were hit by a strong adverse shock lingered. Fixing the exchange rate and delegating monetary policy to the European Central Bank eliminated two primary means by which national governments stimulate their economies to avoid recession. What could replace them? »

His conclusion :

“Those countries whose deficits have soared as a result of the global recession should not be forced into a death spiral – as Argentina was a decade ago.”

“There is a second solution: the exit of Germany from the eurozone or the division of the eurozone into two sub-regions. The euro was an interesting experiment, but, like the almost-forgotten exchange-rate mechanism (ERM) that preceded it and fell apart when speculators attacked the British pound in 1992, it lacks the institutional support required to make it work.”

Read the complete paper in English here, and in French here.

I suggested the same kind of analysis (in French) on the same day exactly here , except that I do not believe that a “southern eurozone” would meet the Mundell optimal currency area criteria any better than the broader eurozone does. Greece will have to default and devaluate, just as Argentina did, for its own good.

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