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PIIE Update Newsletter
August 29, 2012

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Why the Euro Will Survive: Completing the Continent's Half-Built House

C. Fred Bergsten
  C. Fred Bergsten After Europe adopted a common currency, it took almost ten years for the first serious economic and political crisis to hit. Now that it has arrived, Europe must use the opportunity it presents to get the continent's basic economic institutions right and complete the euro's half-built house. Going forward, the euro area's agenda must combine the financial engineering that is necessary to overcome the immediate crisis and a growth strategy to restore the area to economic vitality. Fortunately, both the history of European integration and the way the euro area's leaders have responded to the current turmoil suggest that both the historical imperatives and economic self-interest of all the key countries, creditor as well as debtor, will coalesce successfully. As the drama continues to unfold, watch what the parties involved do rather than what they say. This process will require more treaty revisions and fixes to the euro area's institutions. An increasing number of commentators and economists question whether the common currency can survive, but if the history of the continent's integration is any guide, Europe will emerge from its current turmoil not only with the euro intact but with far stronger institutions and far better economic prospects for the future.

>> Read full article

Why a Collapse of the Euro Area Must Be Avoided

Anders Åslund
  Anders Aslund In the last century Europe has seen the collapse of three multi-nation currency zones: the Habsburg Empire, the Soviet Union, and Yugoslavia—and each ended with disastrous hyperinflation. The lesson is clear. The euro area should be maintained at almost any cost. The only reasons for a breakup of the euro area would be if euro area governance fails completely, or if one nation decides to leave. Greece or any other financially weak country is unlikely to depart from the euro area. In the three hyperinflationary currency union collapses, it was small, wealthy counties that left first. In the current crisis, large imbalances have accumulated between southern debtor countries and northern creditor countries. Any capping of these balances would disrupt the payments mechanism between the euro area countries and impede all economic activity. Many articles on a possible breakup of euro area either see it as a mere devaluation or reckon that its collapse would amount to a major economic disaster. It seems the latter is more likely.

>> Read full op-ed
>> See also: Why a Breakup of the Euro Area Must Be Avoided: Lessons from Previous Breakups

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CNBC Worldwide Exchange
Adam S. Posen on CNBC's Worldwide Exchange: Central Banks Need To Act This Month: Bank of England's Posen
Part I | Part II
Adam S. Posen tells CNBC that the central banks in the United States, United Kingdom, and the European Union should all announce targeted stimulus packages. He explained Fed Chairman Ben Bernanke "should announce" more quantitative easing during Friday's meeting at Jackson Hole.

Adam S. Posen on the BBC's HARDtalk: Break-up of Eurozone 'Very Ill-Advised'
Adam S. Posen appears on the BBC's HARDtalk to talk about quantitative easing, the role of central banks in countering the economic downturn, and the role of austerity measures in resolving the euro area crisis. The video clip includes Posen explaining why it is in Germany's economic interest to restructure the debt of struggling eurozone countries.

Preview of Our Next Issue

Working Paper
Capital Account Policies and the Real Exchange Rate
Olivier Jeanne

Working Paper
Choice and Coercion in East Asian Exchange Rate Regimes
C. Randall Henning

Working Paper
Prospects for Services Trade Negotiations
Jeffrey J. Schott, Minsoo Lee, and Julia Muir
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