1. Currency Zones Don't Solve the Problem of Payments Imbalances

The problems that are now being faced by the eurozone are not new; we have been here before. Remember the global imbalances and currency turbulence that produced the 1985 Plaza Accord, and then the meeting at the Louvre, and, finally, the freefall collapse of the dollar? At that time, many economists proposed that the exchange rate instability produced by global payments imbalances could be resolved by dividing the world into independent, unified currency zones dominated by the dollar, deutsche mark (DM), and yen. However, the introduction of the euro to create an ersatz DM zone does not seem to have produced the stability that the proponents of such a system had envisaged, even within the eurozone. Indeed, the attempts to manage the dollar-DM-yen exchange rates in the Plaza and Louvre Agreements eventually generated an equity and real estate bubble in Japan whose collapse ushered in decades of stagnation and eliminated any possibility for the creation of a yen zone in Asia. As is now recognized, even within the DM zone, the imbalances that had plagued the European Economic Community (EEC) were not eliminated; instead, they were exacerbated by the introduction of the single currency.

2. The “Structuralists” Got It Wrong

Recall the debates between the “economists” and the “structuralists” on the appropriate means of transforming the EEC into a unified “single market” economic zone.