Working Paper: NBER ID: w7517
Authors: Martin Feldstein
Abstract: The creation of the euro and the European Central Bank is a remarkable and unprecedented event in economic and political history: creating a supranational central bank and leaving eleven countries without national currencies of their own. The experience of the first year confirms that one size fits all' monetary policy is not suitable for Europe because cyclical and inflation conditions vary substantially among countries. Labor market policies during this first year will increase this problem in the future and may lead to more trade protectionism. The paper explores reasons why cyclical unemployment, structural unemployment, and inflation may all be higher in the future as a result of the single currency. Although some advocate the euro despite its economic problems because of its assumed favorable effects on European political cohesiveness, the paper argues that it is more likely to lead to political conflict within Europe and with the Unites States.
Keywords: No keywords provided
JEL Codes: F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| The introduction of the euro (F36) | higher cyclical unemployment (J64) |
| The introduction of the euro (F36) | higher structural unemployment (J64) |
| The introduction of the euro (F36) | higher inflation (E31) |
| Labor market policies (J48) | increased trade protectionism (F13) |
| The introduction of the euro (F36) | political conflict in Europe (D74) |
| The introduction of the euro (F36) | tensions with the United States (F52) |