Wednesday, December 29, 2010


From Krugman today:

"So the academic euroskeptics have been proved right in their analysis. Now, that need not mean that the euro was a mistake: there were, after all, political economy considerations. And it certainly doesn’t have to mean that the thing should break up: doing that would be highly disruptive.

But there is, I think, a lesson here, namely that straightforward economic analysis has its virtues. Euro enthusiasts tended to be kind of cosmic about the whole thing, and dismissed the pedestrian cost-benefit approach taken by many US-based economists. Yet those costs and benefits did and do matter. And the crisis Europe is now having is very much the kind of thing those pedestrian analyses suggested was going to happen."

A nice summary of the cost-benefits approach to determining the optimal size for a currency union, and some of the factors that policy makers should take into account- labor mobility, fiscal integration, trade and ability to respond to asymmetric shocks are the main ones.


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