On Eurozone Adjustment (English)

I have mentioned several times on various media of one of the trades off we learned from successive crises: deflate or devalue. Thus I often called exchange rates as part of the solution rather than part of the problem. A country under pressure to adjust imbalances in its economy can allow its currency to depreciate to absorb some of the burden of that adjustment a la UK recently. Below is the openning paragraph from Martin Wolf`'s FT article dated January 5, 2010 on how Eurozone countires cope given fixed exchange rate regimes. I wanted to share this as I am asked too many questions on Greece and Euro. I would recommend all to make time to read the rest of this article.

"What would have happened during the financial crisis if the euro had not existed? The short answer is that there would have been currency crises among its members. The currencies of Greece, Ireland, Italy, Portugal and Spain would surely have fallen sharply against the old D-Mark. That is the outcome the creators of the eurozone wished to avoid. They have been successful. But, if the exchange rate cannot adjust, something else must instead. That “something else” is the economies of peripheral eurozone member countries. They are locked into competitive disinflation against Germany, the world’s foremost exporter of very high-quality manufactures. I wish them luck...."