Some Lessons from a Single Currency

This article looks at the early experience of the Euro and argues that both the original rules established for the European Central Bank and the Stability and Growth pact need to be reconsidered. Failure to do so will result in the whole European economy delivering less growth and prosperity. Without a selfcorrecting mechanism like transfer payments, a single monetary policy is procyclical and destabilizing. Countries growing fast and in danger of over-heating face low or negative real interest rates. Countries in recession face too high real interest rates and are pushed further into sub-potential growth. The Stability and Growth pact further restricts policy options.