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The Euro Awaits Its Verdict

WASHINGTON, DC – The creation of the euro just over a decade ago was a courageous and unique experiment. Today, the outcome – whether the euro will survive, and whether the Europeans are right to keep it – is very much in doubt. But, if the eurozone does survive, it promises great advantages for member countries – and perhaps for the world.

The euro is an ultra-fixed currency among members: participating countries locked themselves into an initial exchange rate vis-à-vis their pre-existing currencies and then threw the keys into the long grass. Nowadays, an increasing number of Europeans are combing that grass, quietly looking for those keys.

The euro shares important features with versions of the old gold standard, under which countries fixed their exchange rates relative to each other by setting the price at which domestic currency could be redeemed in gold. Today, some people espouse the view – often loudly – that the gold standard was synonymous with economic and financial stability. But that is completely at odds with the historical record: the era of the gold standard is replete with boom-bust episodes fueled by over-borrowing by governments, firms, individuals, or all of the above.

There are three differences between the euro and the gold standard – none of which is particularly reassuring at this moment.