The Euro: Bad Idea, Poorly Executed, Hard to Fix
By David Backus, Heinz Riehl Professorship in Finance and Economics and Department of Economics Chair and Kim Schoenholtz, Professor of Management Practice and Director of the Center for Global Economy and Business
Even if the system holds together for a time, the cost is likely to be an extended period of poor economic performance.
If the EU has been a success, the European Monetary Union (EMU) is revealing itself to be the opposite. One might argue that the euro was a mistake from the start, that the history of fixed exchange systems is littered with failure. We have some sympathy with that view, but we'd like to make two different points. First, flaws in the design and implementation of the EMU have made the crisis worse. Second, the decentralized decision-making process of the EU, with political power concentrated in countries rather than Europe, makes effective crisis management nearly impossible.
The euro crisis combines, in our view, a sovereign debt crisis and a banking crisis, with mutually adverse feedback between the two. But design flaws in the system magnified their impact and feedback.
Read the full article as published in The Huffington Post.
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