“The Folly of Currency Pegs”
“The current flap over the sustainability of Greece’s membership in the European Economic and Monetary Union (EMU) is reminiscent, in many ways, of the events leading up to the collapse of the Bretton Woods system—another ultimately untenable currency regime—which was put into place after World War II and terminated by the break of the dollar’s link to gold after August 1971. The period of increased exchange rate flexibility that followed the demise of the Bretton Woods system turned out to be beneficial. The same possibility exists with respect to the aftermath of the current currency crisis in Europe. However, for now, European governments and the International Monetary Fund (IMF) have pledged ?45 billion for Greece, to shore up Europe’s non optimal currency area, which includes (along with Greece) Spain, Portugal, and Ireland in a nominal currency union with Germany. That system will also break down, and Europe will be better off for it, notwithstanding widespread warnings from European politicians of what an “unthinkable” disaster a breakup of the EMU would be.” Read more.
