Kenen on the euro | vox - 0 views
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Early work on optimum currency areas by Robert Mundell had emphasised the symmetry or asymmetry of disturbances hitting different regional economies as a key criterion on which to gauge their suitability for sharing a common currency.
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Peter took this insight further by arguing that disturbances were often sector specific and that the diversification of regional economies was therefore a key consideration in gauging their suitability for monetary union (the better diversified an economy was, the less likely it was to be badly destabilised by a sector-specific shock). (Kenen 1969).
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We now know that Kenen flagged a problem for which the Eurozone could have been better prepared. With an outsized capital-goods producing sector, Germany benefitted from a strong positive shock as a result of China’s emergence onto the global stage, given the Chinese economy’s voracious appetite for capital goods.
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Portugal and Italy, on the other hand, specialised much more heavily in consumer-goods producing sectors and felt the brunt of Chinese competition. No Eurozone member was sufficiently well diversified to shrug off this kind of shock, something that should have made the euro’s architects think twice.
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Specifically, they should have thought again, Kenen argued, about the coordination of national fiscal policies, the need for a common Eurozone budget, and mechanisms for transferring fiscal resources from booming to depressed regions.
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More than any other economist, Peter understood that monetary union was a legal as well as an economic construct. His careful parsing of the Maastricht Treaty explained to the economics profession exactly what the treaty did and did not allow (Kenen 1992).
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Peter even anticipated the debate over TARGET2 imbalances, observing in 1999 that it was possible to “easily conceive of conditions…in which one [national central bank] would be reluctant to build up claims indefinitely on some other national central bank.” (Kenen 1999).
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Finally, Peter observed that the possibility of a member state exiting from the Eurozone could not be ruled out but warned that European officials should be cautious in bandying about the idea (Kenen 1999). “The costs of defecting,” he wrote back in 1999, “could be very high.”