Golden Rules for the Eurozone

The European Monetary Union, as many of its critics maintain, looks a lot like the pre-1913 gold standard, which imposed fixed exchange rates on extremely diverse economies. But is that resemblance as bad as it sounds, or as the euro’s critics insist?

LONDON – The European Monetary Union, as many of its critics maintain, looks a lot like the pre-1913 gold standard, which imposed fixed exchange rates on extremely diverse economies. But is that resemblance as bad as it sounds, or as the euro’s critics insist?

The appeal of the historic gold standard lay in an institutional capacity to build confidence. A completely fixed exchange rate rules out monetary-policy initiative, and consequently makes adjustment to large external imbalances very difficult to carry out. And the burden is unequal, because there is much more pressure on deficit countries to adjust via deflation than on creditor countries to allow higher inflation.

Pessimists are especially worried by the unpleasant gold-standard analogies and lessons. They foresee years and even decades of slow growth in Europe. Politically, too, the process of adjustment by deflation in deficit countries is so unpleasant and difficult that many pessimists think it will ultimately prove to be unsustainable.

To continue reading, please log in or enter your email address.

To access our archive, please log in or register now and read two articles from our archive every month for free. For unlimited access to our archive, as well as to the unrivaled analysis of PS On Point, subscribe now.

required

By proceeding, you agree to our Terms of Service and Privacy Policy, which describes the personal data we collect and how we use it.

Log in

http://prosyn.org/QEhHiGW;

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated cookie policy and privacy policy.