In his just published book, Harvard political economist Jeffry Frieden convincingly assesses the pertinence of “currency politics” over more than a century. An important chapter addresses Europe’s travails with nominal exchange rates, or their suppression. This panel discussion will focus on lessons to be drawn from past and recent history that might help make Europe’s Economic and Monetary Union a viable and prosperous proposition for all member states.
The (nominal) exchange rate is generally held to be a national economy’s most important price. As a result, currency policy may be the most important national policy tool. And this tool is unavailable for Euro Area nation states. They share a common currency: the euro. As the crisis in the Eurozone’s periphery has shown, this may have substantial social as well as political costs. Intra-regional imbalances, which are inevitable, cannot be adjusted by way of the normal, quasi-automatic mechanism of currency movements. Instead, costly domestic policies – now called “internal devaluations” that depreciate the “real” exchange rate – have to be engineered.