Breaking Up is Hard to Do

The Eurozone and the political economy of monetary disintegration

Graham Bird

Published: September 2012


From a position some years ago where the euro was seen as set to challenge the dollar as the world’s leading currency, there are now serious concerns that the ongoing Eurozone crisis will lead to some countries eventually withdrawing from it, beginning a process of European monetary disintegration. In retrospect, insufficient attention was paid to the economics of optimum currency area theory when the Eurozone was set up, and too much to the apparent political imperatives of European unity. Reversing the process of European monetary integration is not straightforward. There are significant uncertainties, but there are also serious doubts as to whether the reforms needed to sustain the Eurozone in its current form will be introduced. The withdrawal of some of the weaker economies does not signal the end of the euro. By analogy, while some marriages are based on close compatibility, and are successful and long lasting, others encounter irreconcilable differences. In these cases divorce, although unpleasant and stressful, may be the preferred outcome.



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Is Dollarisation a Viable Option for Latin America?
Author: Graham Bird

In the aftermath of the East Asian financial crisis there has been much discussion of exchange rate policy in developing countries. Some observers have suggested that they should opt either for flexible exchange rates or for firmly fixed rates. Adopting the US dollar as legal tender and abandoning the domestic currency is one possibility. In conditions of economic crisis Ecuador dollarised in early 2000. Will other Latin American economies follow or will Ecuador live to regret the decision? This article assesses the arguments.

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Sins of the Commission
Author: Graham Bird

In the aftermath of the East Asian financial crisis there has been much discussion of a new international financial architecture. A significant contribution to this debate is the Report of the International Financial Institution Advisory Commission, sponsored by the US Congress, which was chaired by Allan Meltzer and published in March 2000. The Commission makes a number of radical proposals for reform. Professor Bird argues that unfortunately the analysis underlying many of them is flawed, or at least highly dubious. Reform based on the Commission’s recommendations would therefore be largely ill-directed; it would be bad news for developing countries and countries in transition, and could lead to greater global instability. An alternative approach to reform exists which attempts to modify the IFI’s operations in ways that build on the lessons of experience rather than simply discontinues them, as the Meltzer Commission recommends.

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Is there a Case for an Asian Monetary Fund?

The East Asian financial crisis has spawned a number of proposals for institutional reform. Some envisage reforming existing institutions, particularly the International Monetary Fund (IMF), while others suggest that new institutions are needed. Amongst them is the idea of establishing an Asian Monetary Fund (AMF). Evaluating this proposal raises a number of complex issues. Its appeal hinges on whether it would be able to undertake some functions better than the IMF. To the extent that crises are regionally contained, there may be a case for mobilising finance to help deal with them at the regional level. This could also take pressure off the constrained resources of the IMF. In as much as access to finance from an AMF would be conditional upon compliance with specified standards and policy guidelines, an AMF might also help to prevent a future financial crisis in the region.

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