Lessons we have learned from the crisis, by Jordi Galí
How would you rate the European monetary integration process?
“Before the crisis, I’d say there was a widespread perception that the euro, the process of European monetary integration, had been a success, a great success. [...] But as a result of the crisis, this rather idyllic view of the introduction of the euro has changed. We now realize that the eurozone is more than one economy: it’s a group of very heterogeneous economies that don’t necessarily behave the same way all the time.”
“In the past – even in the context of the European Monetary System, for example, when countries maintained fixed but adjustable exchange rates – the imbalances that built up in the pre-crisis years had a relatively easy solution: devaluation.”
“In the past – even in the context of the European Monetary System, for example, when countries maintained fixed but adjustable exchange rates – the imbalances that built up in the pre-crisis years had a relatively easy solution: devaluation.”
“In normal circumstances, when a country has a central bank and monetary policy can operate normally, a reduction in wages, for example, or a cost reduction achieved by boosting productivity would eventually result in lower inflation, which would lead the central bank to respond by cutting interest rates. [...] But in the current circumstances this kind of central bank response is absent. First, because the countries in the periphery of the eurozone no longer have their own central banks, and the European Central Bank will never respond to developments in individual countries. [...] Second, even if these countries had their own central banks, as the United States does, their hands would be tied: interest rates cannot be cut any further.”