Claims on Future of Euro Seem Excessively Bold
Letter to the Editor

Sir, Your editorial's assertion that the euro's disintegration was never at risk ("Making eurozone safe from failure", October 13) sits oddly with the truly massive financial support package that had to be put in place to hold the euro together.

Not only had the Treaty of Lisbon's "no bail-out" clause to be abandoned and a €750bn EU-IMF safety net put in place, but the European Central Bank also had to engage in the aggressive bailing out of the eurozone's periphery through the backdoor of its rediscount window.

You also seem to be excessively bold in making the assertion that no country would voluntarily abandon the euro for the simple reason that the shock of leaving would outweigh any advantage of life on the outside. This assertion is all too reminiscent of the arguments made in the 1930s that no country could afford to leave the gold standard, or that leaving the Exchange Rate Mechanism in the early 1990s was not a viable option.

The fundamental point that you overlook is that attempting to reduce a budget deficit by around 10 percentage points of gross domestic product while maintaining a fixed exchange, as Europe's peripheral countries are now required to do, is a sure recipe for a prolonged depression in those economies. This would seem to be all the more so the case at the time of their facing very high interest rate spreads and a strong euro.

While one would not want to minimise the short-term trauma that exiting the euro would involve for the eurozone's peripheral countries, it would at least offer them the future prospect of strong export growth, which might cushion the depressing effect on their economies of the Herculean fiscal retrenchment that they are forced to endure.

Desmond Lachman is a resident fellow at AEI.

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About the Author

 

Desmond
Lachman
  • Desmond Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the International Monetary Fund's (IMF) Policy Development and Review Department and was active in staff formulation of IMF policies. Mr. Lachman has written extensively on the global economic crisis, the U.S. housing market bust, the U.S. dollar, and the strains in the euro area. At AEI, Mr. Lachman is focused on the global macroeconomy, global currency issues, and the multilateral lending agencies.
  • Phone: 202-862-5844
    Email: dlachman@aei.org
  • Assistant Info

    Name: Emma Bennett
    Phone: 202.862.5862
    Email: emma.bennett@aei.org

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