Wednesday , August 15 2018
Home / Macro and Other Market Musings / The Future of the Eurozone

The Future of the Eurozone

Summary:
So we are live at NRO discussing the future of the Eurozone: Albert Einstein is rumored to have quipped that doing the same thing over and over again and expecting different results is the definition of insanity. If he were alive today, Einstein might say this is the definition of some key euro-zone policymakers. There I argue hard choices have to made in the Eurozone: further integrate or separate. So where does this leave the euro zone? For now, euro-zone officials are still kicking the can down the road, but at some point they will face a fork. One path will force further integration upon the euro zone, along the lines of Emmanuel Macron’s proposal and better ECB monetary policy. The other path will lead to the separation of the euro zone. As Ashoka Mody shows in his new book, the

Topics:
David Beckworth considers the following as important:

This could be interesting, too:

Free exchange writes Free exchange 1970-01-01 00:00:00

Scott Sumner writes Reveal, depress, destroy: Three types of contagion

Scott Sumner writes Trump derangement syndrome

[email protected] (Cyril Morong) writes Robots Are Ready to Shake (and Stir) Up Bars

So we are live at NRO discussing the future of the Eurozone:
Albert Einstein is rumored to have quipped that doing the same thing over and over again and expecting different results is the definition of insanity. If he were alive today, Einstein might say this is the definition of some key euro-zone policymakers.
There I argue hard choices have to made in the Eurozone: further integrate or separate.
So where does this leave the euro zone? For now, euro-zone officials are still kicking the can down the road, but at some point they will face a fork. One path will force further integration upon the euro zone, along the lines of Emmanuel Macron’s proposal and better ECB monetary policy. The other path will lead to the separation of the euro zone. As Ashoka Mody shows in his new book, the 20-year history of the euro zone suggests the latter path is more likely. Breaking up the euro zone, though, need not end the EU. As suggested by Ambrose Evans-Pritchard and Ramesh Ponnuru, the periphery could keep using the euro while the core could exit and adopt their own currency: Call it the Deutschmark 2.0. This approach would minimize the financial stress from the breakup of the currency union.
One chart that did not make it into the final article is below showing the OCA theory. It shows that if a region’s business cycle is similar to the currency union or if there are sufficient shock absorbers in place, or some combination of the two exists, then it makes sense for the region to be in the currency union. If a regional economy does not meet these criteria, like Italy, then it would be inside the OCA frontier curve in the figure and should not join the currency union. 

My conclusion in the article effectively says that Eurozone officials are not willing or able to make the changes needed to push countries like Italy beyond the OCA frontier. Ashoka Mody makes a convincing case in his book that, if anything, the Eurozone is pushing countries like Italy farther inside, away from the OCA frontier. Better to address the inherent tensions of the Eurozone now than to keep kicking the can down the road. 

The Future of the Eurozone

David Beckworth
I am an associate professor of economics at Western Kentucky University, an adjunct scholar at the Cato Institute, and a former economist at the U.S. Department of Treasury.

Leave a Reply

Your email address will not be published. Required fields are marked *