Working Paper: NBER ID: w17617
Authors: Martin S. Feldstein
Abstract: The creation of the euro should now be recognized as an experiment that has led to the sovereign debt crisis in several countries, the fragile condition of major European banks, the high levels of unemployment, and the large trade deficits that now exist in most Eurozone countries. Although the European Central Bank managed the euro in a way that achieved a low rate of inflation, other countries both in Europe and elsewhere have also had a decade of low inflation without incurring the costs of a monetary union. \n \nThe emergence of these problems just a dozen years after the start of the euro in 1999 was not an accident or the result of bureaucratic mismanagement but the inevitable consequence of imposing a single currency on a very heterogeneous group of countries, a heterogeneity that includes not only economic structures but also fiscal traditions and social attitudes. \n \nThis paper reviews (1) the reasons for these economic problems, (2) the political origins of the European Monetary Union, (3) the current attempts to solve the sovereign debt problem, (4) the long-term problem of inter-country differences of productivity growth and competitiveness, (5) the special problems of Greece and Italy, (6) and the pros and cons of a Greek departure from the Eurozone.
Keywords: No keywords provided
JEL Codes: E0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Creation of the euro (F36) | Sovereign debt crises (F34) |
| Creation of the euro (F36) | Fragility of European banks (F65) |
| Creation of the euro (F36) | Trade deficits in eurozone countries (F14) |
| European Central Bank's monetary policy (E52) | High interest rates for Greece and Italy (F34) |
| Absence of a flexible exchange rate system (F33) | Rising unemployment (F66) |
| Absence of a flexible exchange rate system (F33) | Trade deficits (F14) |
| Political imposition of austerity measures (E65) | Tensions in Greece (D74) |