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January 12th 2009

Reflections on the Euro

The last two weeks have been eventful for the Euro: the common currency celebrated its 10th anniversary, Slovakia became the 16th member currency, and 2008 came to a volatile close. Analysts have taken advantage of this confluence of developments to publish a tide of opinion outlining its future. Supporters argue that the currency has forced member states to become fiscally responsible, as they can no longer print money to fund budget deficits. Moreover, the credit crisis proved the currency's raison d'etre; it has been an island of stability in a sea of volatility, with the currencies of some unlucky countries declining by 20% or more. Exchange rate volatility and interest rate divergence, which can cripple even robust economies in times of crisis, was nowhere to be found in the EU. As a result, Denmark, Iceland, and even the UK, could conceivably adopt the Euro in the not-too-distant future, especially since the latter's British Pound is closing in on parity.

Meanwhile, the Euro's detractors maintain that a one-size-fits-all economic and monetary policy is still not appropriate for a region as economically diverse as the EU. For example, while low interest rates may have been conducive to stable economic growth in Germany and France, they probably fomented real estate bubbles in Spain and Ireland, making the collapse even more painful in those locales than it had to be. Regardless, the consensus is that the Euro is here to stay, and will probably become an increasingly viable alternative to the Dollar. The Wall Street Journal reports:

The euro has climbed sharply again since Mr. Bernanke cut rates virtually to zero last month and signaled his new policy would be "quantitative easing" — i.e., printing as much money as it takes to revive the U.S. economy.

Read More: The Euro Decade and Its Lessons

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Posted by Adam Kritzer | in Euro | No Comments »

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