'The Future of the Euro: Lessons from History'

Brad DeLong:

The Future of the Euro: Lessons from History: The 1919-1939 interwar period taught us four lessons:

1. In order for the world economy to be prosperous, adjustment to macroeconomic disequilibrium needs to be undertaken by both "surplus" and "deficit" economies--not by "deficit" economies alone.

2. If the world economy is to have any chance of avoiding or limiting crises, an integrated banking system requires an integrated bank regulator and supervisor.

3. In order for crises to be successfully managed, the lender of last resort must truly be a lender of last resort: it must create whatever asset the market thinks is the safest in the economy, and must be able to do so in whatever quantity the market demands.

4. In order for any monetary union or fixed exchange rate system larger than an optimum currency area to survive, it must be willing to undertake large-scale fiscal transfers to compensate for the exchange rate movements to rapidly shift inter-regional terms of trade that it prohibits.

I, at least, thought that everybody--or everybody who mattered in governing the world economy--had learned these four lessons that 1919-1939 had so cruelly taught us. Now it turns out that the dukes and duchesses of Eurovia had, in fact, learned none of them. History taught the lesson. But while history was teaching the lesson, the princes and princesses of Eurovia and their advisors were looking out the window and gossiping on Facebook. ...

He goes on to try to explain why the system ended up with so many dysfunctional features. (I would add the us-them nature of the interactions between the nations in Europe that the various crises have exposed. It is not the "all for one and one for all" attitude that is needed to implement the things Brad is suggesting, e.g. a "a single Eurovia-wide banking regulator" and a " fiscal-transfer" system. Instead it's a point your finger at others and moralize about the differences in behavior. It's a lot like the peace we thought we had in macroeconomics -- the convergence of thought between the various schools that people like Olivier Blanchard talked about -- until the Great Recession exposed the deep divisions that still exist).