A Solution for the Eurozone

Abstract

The dollar, which acted as the indispensable global currency hub for half a century, showed recurrent bouts of nerves from the 1970s onwards and by the end of the twentieth century its foundations were visibly crumbling. Given the absence of an alternative international monetary standard, governments naturally had to consider what options were available to discipline economic and monetary management. In Chapter 5 we looked at various strategies open to individual countries and found that few of the candidates proved to be attractive. The best would be a strict type of narrow money control, but this would be difficult to implement, especially for smaller economies, because domestic monetary conditions could be swamped by external flows. FinCR showed up the weaknesses of flexible exchange rates with inflation targeting, while the central banks’ adoption of ‘IT plus’ (inflation-targeting with a macro-prudential toolkit to assure financial stability) would risk weakening the anchor for prices. On the other hand, trying to find stability by fixing exchange rates or adoption of a currency board would be likely to be beneficial only so long as there was a good external anchor to link to. The rolling recessionary crisis after 2008 showed there were no such reliable external currency anchors in sight. Central bankers were in charge of ships that had neither anchors nor compasses on board.

Was there a regional alternative to the absence of a proper international standard? The answer was ‘No’ — the Eurozone itself needed international support.