Policy Options for the Euro: Heterodoxy Ahead

Abstract:

This article compares the euro crisis to the Great Depression. The challenge in both is to depreciate the real exchange rate of crisis countries – regain ‘competitiveness’ – without depreciating the nominal exchange rate. The monetary arrangements in the Great Depression elicited zeal against nominal depreciation similar to that in the eurozone today. To anticipate the conclusion: recovery in the Great Depression depended upon nominal depreciation or imposition of currency controls. Similar heterodoxy is in store for the eurozone.