Monday, November 19, 2007

Is the euro doomed?

Barry Eichengreen writes;

The world economy is continually changing, but one constant is dissatisfaction with the euro. Toward the beginning of the decade, the main complaint was that the euro was too weak for booming economies like Ireland. Now the complaint is that it is too strong for growth-challenged countries like Italy.

To be sure, the source of the current problem is external. It stems from the fall of the dollar, reflecting a combination of economic and financial problems in the United States, and the insistence of the Chinese authorities that the renminbi should follow the greenback. But that does nothing to defuse the complaints.

The negative impact is being felt by all euro-area members. But some countries where growth was already stagnant, such as Italy, are least able to cope. Already in June 2005, following two years of euro appreciation, then-Italian welfare minister Roberto Maroni declared that “the euro has to go.” Then-prime minister Silvio Berlusconi followed by calling the euro “a disaster.” But this earlier episode of appreciation pales in comparison with what has happened since. And if the dollar depreciates further and the US falls into a full-blown recession – both of which are more likely than not – calls like these will be back.

So is the euro doomed? After seeing the number of euro-area countries rise from 10 in 1999 to 15 at the beginning of 2008, will the process shift into reverse? If one country leaves the euro area by reintroducing its national currency, will others follow? Will the entire enterprise collapse?

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