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A Tale of Two Currency Areas

The US and Europe both operate single-currency areas, but only Europe's faces uncertainty about its survival. Their similarities and differences, particularly with respect to internal labor mobility, productivity, and fiscal policies, suggest why – and provide clues about whether the eurozone can evolve into a stable monetary union.

PALO ALTO – The United States and Europe are two giant free-trade areas, each wealthy but with serious short-run problems and immense long-run challenges. They are also two single-currency areas: the dollar and, for much of Europe, the euro. The challenges facing both are monumental.

But only Europe’s currency union faces uncertainty about its future; America faces no existential crisis for its currency. The two economic powers’ similarities and differences, particularly with respect to internal labor mobility, productivity, and fiscal policies, suggest why – and provide clues about whether the eurozone can weather the crises on its periphery and evolve into a stable single-currency area.

Labor mobility from poorer to richer areas provides a shock absorber against differential economic hardship. The other natural shock absorber is a depreciating currency, which increases competitiveness in the area hit hardest. That cannot happen with a common currency, and economic adjustment is doubly difficult when labor is not mobile enough to help mitigate regional contractions in income and unemployment.

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