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Europe's OrphanThe Future of the Euro and the Politics of Debt$
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Martin Sandbu

Print publication date: 2017

Print ISBN-13: 9780691175942

Published to Princeton Scholarship Online: May 2018

DOI: 10.23943/princeton/9780691175942.001.0001

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Before the Fall

Before the Fall

(p.25) Two Before the Fall
Europe's Orphan

Martin Sandbu

Princeton University Press

This chapter discusses the role of Europe's monetary union in creating a crisis that first erupted in US mortgages. Because of their monetary union, European economies racked up greater risks in the 2000s boom than they would have done had they kept their individual currencies. The factors invoked to blame the euro include the destabilising effect of a single interest rate for the entire eurozone; the misalignment of real exchange rates when nominal exchange rates could no longer adjust; the ability to run current account deficits that were too large and lasted too long; and, finally, the fact that debt was accumulated in a currency that could not be printed at will by national central banks. The chapter argues that all these factors have been commonly misunderstood.

Keywords:   monetary union, European economies, individual currencies, euro, single interest rate, eurozone, exchange rates, account deficits, debt

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