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.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Desmond
Lachman

What's new on AEI

We still don't know how many people Obamacare enrolled
image The war on invisible poverty
image Cutting fat from the budget
image Speaker of the House John Boehner on resetting America’s economic foundation
AEI on Facebook
Events Calendar
  • 22
    MON
  • 23
    TUE
  • 24
    WED
  • 25
    THU
  • 26
    FRI
Monday, September 22, 2014 | 2:30 p.m. – 4:00 p.m.
Policy implications of the new US labor market normal

We welcome you to join us as a panel of economists discuss US wage and price prospects in the coming months and the implications for the Federal Reserve’s current unorthodox monetary policy.

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.