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They could also import from non-euro countries; what then?

Under an "economic equilibrium" frame it would go something like this:

Then the Eurozone would no longer be in trade balance as a whole so there would be a downward pressure on the exchange rate. The rest of the Eurozone would benefit from the lower exchange rate, and would increase their exports outside the Eurozone, too. Equilibrium (again balanced trade EZ-wide) would be attained at a lower exchange rate. But now Germany would be running a smaller trade surplus and some of the deficit countries a smaller deficit.

Imports would become more expensive and that would lead to some pain, but also for opportunities for import substitution if because of the lower exchange rate production in the EZ became profitable where it was marginally unprofitable before.

Unfortunately, the ECB would react to the consumer price inflation resulting from the more expensive imports by raising interest rates and nipping in the bud any private-sector attempts at investment for import substitution. And the public sector, as we know, cannot do anything meaningful without running afoul of EU "illegal state aid" rules.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Sat Feb 18th, 2012 at 01:51:03 PM EST
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