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Euroland's Original Sin

Author

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  • Dimitri B. Papadimitriou
  • L. Randall Wray

Abstract

From the very start, the European Monetary Union (EMU) was set up to fail. The host of problems we are now witnessing, from the solvency crises on the periphery to the bank runs in Spain, Greece, and Italy, were built into the very structure of the EMU and its banking system. Policymakers have admittedly responded to these various emergencies with an uninspiring mix of delaying tactics and self-destructive policy blunders, but the most fundamental mistake of all occurred well before the buildup to the current crisis. What we are witnessing today are the results of a design flaw. When individual nations like Greece or Italy joined the EMU, they essentially adopted a foreign currency—the euro—but retained responsibility for their nation's fiscal policy. This attempted separation of fiscal policy from a sovereign currency is the fatal defect that is tearing the eurozone apart.

Suggested Citation

  • Dimitri B. Papadimitriou & L. Randall Wray, 2012. "Euroland's Original Sin," Economics Policy Note Archive 12-08, Levy Economics Institute.
  • Handle: RePEc:lev:levypn:12-08
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    References listed on IDEAS

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    1. L. Randall Wray, 1998. "Modern Money," Economics Working Paper Archive wp_252, Levy Economics Institute.
    2. C. Sardoni & L. Randall Wray, 2007. "Fixed and Flexible Exchange Rates and Currency Sovereignty," Economics Working Paper Archive wp_489, Levy Economics Institute.
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    Cited by:

    1. Alberto Botta, 2012. "Conflicting Claims in the Eurozone? Austerity’s Myopic Logic and the Need for a European Federal Union in a post-Keynesian Eurozone Center-Periphery Model," DEM Working Papers Series 011, University of Pavia, Department of Economics and Management.
    2. Greg Hannsgen & Dimitri B. Papadimitriou, 2012. "Fiscal Traps and Macro Policy after the Eurozone Crisis," Economics Public Policy Brief Archive ppb_127, Levy Economics Institute.
    3. Constantinos Alexiou & Joseph G. Nellis, 2013. "Challenging the Raison d’etre of Internal Devaluation in the Context of the Greek Economy," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 60(6), pages 813-836, December.
    4. C. J. Polychroniou, 2012. "Greece's Bailouts and the Economics of Social Disaster," Economics Policy Note Archive 12-11, Levy Economics Institute.
    5. C. J. Polychroniou, 2013. "The Tragedy of Greece: A Case against Neoliberal Economics, the Domestic Political Elite, and the EU/IMF Duo," Economics Policy Note Archive 13-01, Levy Economics Institute.
    6. C. J. Polychroniou, 2014. "The Myth of the Greek Economic 'Success Story'," Economics Policy Note Archive 14-3, Levy Economics Institute.
    7. Botta, Alberto, 2012. "Conflicting Claims in Eurozone? Austerity’s Myopic Logic and the Need of a European federal union in a post-Keynesian Eurozone Center-Periphery Model," MPRA Paper 41700, University Library of Munich, Germany.

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