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The Euro Crisis and Its Aftermath$
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Jean Pisani-Ferry

Print publication date: 2014

Print ISBN-13: 9780199993338

Published to Oxford Scholarship Online: May 2014

DOI: 10.1093/acprof:oso/9780199993338.001.0001

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Let’s Break It Up?

Let’s Break It Up?

Chapter:
(p.116) Chapter 15 Let’s Break It Up?
Source:
The Euro Crisis and Its Aftermath
Author(s):

Jean Pisani-Ferry

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199993338.003.0015

When the exchange rate cannot be controlled as is the case in euro area countries, the only solution to regain competitiveness is a downward adjustment of prices and wages. This process, known to economists as internal devaluation, is painstakingly difficult to implement though not impossible to carry out, as demonstrated by Latvia and Ireland. However, the conditions that made the experience a success in these two countries are not met in Greece, nor are they met in most other euro area countries. Given the size of these challenges, exiting the euro may appear to be a more straightforward answer. However, those in favour of such a solution ignore most of the obstacles involved: legal, technical, and most importantly, economic and financial. These obstacles do not mean that a euro exit it impossible, but they do mean that the economic, financial and social costs would be extremely high. Moreover, it would demonstrate that there is no such thing as an irreversible commitment and the risk of an overall collapse of the euro area would increase significantly, causing more disruption than anything Europe has known since the end of the Second World War.

Keywords:   euro, Greece, prices, wages, Germany, devaluation, Latvia, Ireland, euro crisis, Europe

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