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Devaluations are a recurrent feature of fixed exchange rate regimes without surplus recycling mechanisms.

The Euro is a currency union without a surplus recycling mechanism, and with the "no bailout, no default, no exit" clauses it is simply a macroeconomic impossibility.

The European Union's industrial policy is to deindustrialise accession countries to protect core industries, which only strengthens the trade imbalances and is the reverse of what a suplus-recycling mechanism would induce.

The Gold Standard failed, Bretton Woods failed, the European Exchange Rate Mechanism failed and the Euro has failed, all for the same reason. The refusal of gold bugs in surpus countries to countenance the idea that they, too, are responsible for setting up negative feedback loops on trade imbalances.

Critics of the Euro used to say it would not withstand an asymmetrical shock. The fact is that the Euro manufactures asymmetrical shocks and then fails to withstand them. So the Critics of the Euro were right all along.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Thu Jun 2nd, 2011 at 09:26:57 AM EST
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But the original sin was that Italy and the others begged to be let in.

Germany did not want them in, because the Germans did not expect the Italians and other peripherals to be able to live with the euro - and in that they were not wrong.

And even back then, more than 20 years ago, they were not willing to make the political arrangements that would have made a currency union with structural deficit countries possible.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Thu Jun 2nd, 2011 at 09:44:06 AM EST
[ Parent ]
Italy and the others were already in the Exchange Rate Mechanism.

The poriphery's political commitment to European integration amounts basically to a Stockholm syndrome in the case of monetary policy.

It appears Germany of all countries has no political commitment to European integration, of which maybe France is to blame as they managed to prevail over Germany in the first EEC constitutional crisis, in which Germany was Federalist and France Nationalist.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Thu Jun 2nd, 2011 at 10:02:59 AM EST
[ Parent ]

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