Was the Euro a Bad or a Good Idea?

Abstract

Common sense suggests that transactions and contracts are denominated in terms of currencies that tend to be stable and under conditions of relative stability, such contracts tend to account rationally for the inherent uncertainty in exchange rates. The discussion about “exogenous shocks” was found to be largely irrelevant to our discussion and uncertainty, for the most part, is not due and does not come from “exogenous” factors to the economy as a whole but rather from policy uncertainty. Confidence to a currency means confidence to the event that a stable configuration of fiscal and monetary policies will persist in the future without drastic changes beyond any expectation. If such changes occur there will be price and quantity effects in all markets along with a revision of plans for future investment and the re-allocation of financial portfolios. The opponents of the Euro tend to focus too much on appearances instead of analyzing the issues in depth. They argue that because the European South ran large public deficits at a specific time period the whole experiment of the common currency is at stake and then they argue about optimal currency areas, “asymmetric shocks” and various other matters that are only peripheral if not totally misguided and unfounded.