Sunday, November 13, 2011

The Prescience of Rudiger Dornbusch

As events have unfolded in Europe over the past year, I keep thinking back to an article written by Rudiger Dornbusch in Foreign Affairs.  The summary:

The battle for the common currency may be remembered as one of the more useless in Europe's history. The euro is hailed as a solution to high unemployment, low growth, and the high costs of welfare states. But the deep budget cuts required before integration are already causing pain and may trigger severe recessions. If the European Monetary Union goes forward, a common currency will eliminate the adjustments now made by nominal exchange rates, and the central bank will control money with an iron fist. Labor markets will do the adjusting, a mechanism bound to fail, given those markets' inflexibility in Europe.

He wrote the piece in 1996. It is now behind a pay-wall, but if you have access to a university library, you can probably get access to the piece.

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