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But the rosy outlook changed in late March, when Brink’s started calculating its sales using the recently created exchange rate of about 50 bolívares to the dollar

Companies have ways of chipping away at the locked-up profits, including charging higher fees to Venezuelan subsidiaries for goods and services provided by the parent corporation. But many foreign companies are stuck holding vast troves of bolívares that shrink in value each time there is a devaluation.

Procter & Gamble said in April that it had the equivalent of about $900 million in cash in this country and that it was taking a $275 million write-down as a result of applying the government’s intermediate exchange rate to its Venezuelan balance sheet. Colgate-Palmolive wrote down $174 million, while Ford wrote down about $316 million.

“All the companies knew there would be a loss because everyone knew there wouldn’t be dollars” available at the fixed exchange rate, said an executive with an American company in Venezuela who spoke on the condition of anonymity. “We were trapped because the law here did not give you a way out.”

Stores are often out of basic products such as dish soap or corn flour. DirecTV has stopped taking on new customers because it cannot get the dollars to import more dish antennas.

Without dollars, car companies cannot import the parts needed to assemble vehicles; Ford and Toyota were forced to temporarily close their factories.

In yet another reflection of the currency restrictions, the government has refused to let airlines operating in Venezuela trade the bolívares they receive for ticket sales and other services here for dollars. The International Air Transport Association says that the airlines have more than $4 billion in revenues held up in the country, based on the government’s base exchange rate at the time the tickets were sold.

American Airlines says that it is owed $750 million by the country’s government.

They have to

Many countries have a tough adjustment to achieve. In doing so, they indeed have to be careful about their social implications. When adjustment requires a decrease in the real wage (or at least a decrease relative to productivity), it is essential that the decrease be fairly shared. You have to make sure that there is a safety net in place. If the pension system has to be made less generous, which is the case in a number of countries, you have to make sure the lowest pensions are protected.

It is clear that adjustment in the Euro zone requires a decrease in the relative price of periphery countries and an increase in the relative price of core countries. If the ECB wants to maintain two percent inflation for the Euro zone as a whole, this implies, arithmetically, that core countries have to have inflation higher than two percent, periphery countries have to have inflation lower than two percent, until the adjustment has taken place.

if intra-eurozone mobility were anything like Mundell’s ideal, today we would not be seeing 25% unemployment in Spain while Germany’s unemployment rate is below 7%.CommentsView/Create comment on this paragraph

Peter Kenen argued in the late 1960’s that without exchange-rate movements as a shock absorber, a currency union requires fiscal transfers as a way to share risk.

Later, Maurice Obstfeld pointed out that, in addition to fiscal transfers, a currency union needs clearly defined rules for the lender of last resort. Otherwise, bank runs and debt panics will be rampant. Obstfeld had in mind a bailout mechanism for banks, but it is now abundantly clear that one also needs a lender of last resort and a bankruptcy mechanism for states and municipalities.

The euro was sold to us as a modernization program for Europe, and we were also told that it would push the Community toward stability. But, in reality, it has drifted apart and become a truly unstable entity.

The euro was sold to us as a modernization program for Europe, and we were also told that it would push the Community toward stability. But, in reality, it has drifted apart and become a truly unstable entity.

There is no reason why the euro should be coming under pressure. The decision to introduce it was smart and far-sighted.

thanks to the common currency, it's no longer possible, for example, to wage speculative attacks on individual currencies. This eliminates a key disruptive factor that massively destabilized markets in the past.

Still, thanks to the common currency, it's no longer possible, for example, to wage speculative attacks on individual currencies. This eliminates a key disruptive factor that massively destabilized markets in the past.

Starbatty: But that's exactly the problem! In the past, exchange rates served as a valve. Individual countries could control their economies by allowing their currencies to gain or lose value.

But that's exactly the problem! In the past, exchange rates served as a valve.

SPIEGEL: What would happen if the old currencies were reintroduced in the euro zone tomorrow? Bofinger: It would be a catastrophe. The German mark would have to appreciate significantly -- I'd say by 10 percent to 20 percent. Everything that we've worked so hard to attain in terms of competitiveness would vanish overnight.

What would happen if the old currencies were reintroduced in the euro zone tomorrow? Bofinger: It would be a catastrophe. The German mark would have to appreciate significantly -- I'd say by 10 percent to 20 percent. Everything that we've worked so hard to attain in terms of competitiveness would vanish overnight.

SPIEGEL: Would it have been better if all countries in Europe had kept their own currencies? Starbatty: Yes. A community can't function when it's made up of unequal partners who are supposed to behave as equals. With the euro, Germany has created an artificial competitive advantage for itself, which has enabled us to conquer markets all over the world.

Starbatty: Yes. A community can't function when it's made up of unequal partners who are supposed to behave as equals. With the euro, Germany has created an artificial competitive advantage for itself, which has enabled us to conquer markets all over the world.

Since 1995, there have been almost no appreciable wage increases in Germany, partly as a result of pressure brought on from increases in subcontracted labor. Politicians have done everything to relieve employers of the burden of paying social security contributions because we fell into this strange panic, believing we weren't globally competitive. With our economic policies, we placed too much of a lopsided emphasis on exports.

Politicians have done everything to relieve employers of the burden of paying social security contributions because we fell into this strange panic, believing we weren't globally competitive.

The ECB stepped into the void left by foreign investors pulling their savings out of these current account deficit countries by lending their banks more money.

When large capital flight to Germany occurred before the euro’s introduction, the deutschemark would appreciate against other European currencies. While pegged against the deutschemark, these exchange rates were still flexible. That flexibility disappeared with the euro. When capital flight occurs today, the Bundesbank effectively ends up with loans to the other national central banks that are reflected in the TARGET2 claims on the Eurosystem. 

Debt overhangs persist, growth is mediocre and the governance structure – a common monetary policy without a centralized fiscal policy – is a challenge.

The ECB has allowed banks to borrow as much money as they want for up to three years. Indeed, at the end of February banks were borrowing €1.2 trillion from the ECB, twelve times the amount of their required reserves. With so much excess liquidity in the money markets, further capital flight is likely to cause a disproportionable share of this money to end up in Germany

Concerned about the stability of the euro, Germany’s savers are shifting their money into real estate. German residential house prices and rents rose by 4.7% last year, the fastest increase since 1993’s reunification boom. So far, Germans are not leveraging to buy houses. Growth in German mortgages is paltry at just 1.2% per annum according to the ECB as of December 2011, but in our view all ingredients for a debt-financed house price boom are there. Distrust in the euro is rising,

The ECB’s generous monetary policy will delay the internal devaluation adjustment of the eurozone’s current account deficit countries.

Mexico’s current account deficit fell by 5.3% of GDP in 1995, according to Haver Analytics, in the wake of capital flight following the government’s decision to float the peso in 1994, while its recession lasted only one year.

Look beyond the debt crisis and take the longer view. European growth has been slowing for 40 years. During this period its share of global gross domestic product has shrunk by 10 percentage points; that of the US has held steady.

After the fall of the Berlin Wall, chancellor Helmut Kohl offered the D-Mark to President François Mitterrand in exchange for French acceptance of German reunification. This noble gesture of self-containment was not, of course, an entirely selfless act. As part of a hard-headed bargain in return for giving up the symbol of German economic primacy, Europe’s monetary and fiscal policy would be “Germanised”.

Mr Weidmann is right to fear the moral hazard contemplated by the ECB and its lackadaisical allies from Madrid to Berlin.

But disaster does not wait.

Today, Germany grudgingly does the minimum needed to keep the euro area intact. If exit to emulate Greece becomes an attractive proposition, Germany will be put on the spot—and the magnanimity it shows in place of its current miserliness will be the ultimate test of how much it values the euro area.

5. Export surpluses create no real value if they translate into claims vis‐à‐vis countries which ultimately cannot pay their debts,

6. The ECB Council overstepped its mandate when it transferred to Eurozone national central banks, primarily the Bundesbank, the task of financing the public and private deficits of other countries.

7. Germany’s liability for the bail‐out initiatives does not total 211 billion euros, as often cited, but is actually now close to 600 billion euros if the far larger bailout initiatives of the ECB are included in this figure.

8. The Target credits and the purchase of government bonds by the ECB system transfer the investment risk of private investors and banks to the taxpayers of economically sound countries, posing a threat to the euro because they offer debtor countries incentives to advocate inflationary policies at the ECB Council which would help them defer their obligation to repay their foreign debts.

9. Eurobonds would undermine debt discipline, lead to much higher interest burdens for the German state, and anew induce capital flows in Europe that would exacerbate the external imbalances.

) Target debts are to be settled on an annual basis with interest‐bearing, marketable assets as in the US.

g) Countries that are not competitive enough to repay their foreign debts should, in their own interest, leave the Monetary Union.”

I also appreciate the fact that the declaration envisages a credit boom in Germany that would ultimately rebalance the eurozone economy. Nevertheless, this rebalancing is likely to prove painfully slow and certainly requires a prolonged period of relatively high inflation in Germany, to offset relatively low inflation in the vulnerable countries. It is far from clear that German public opinion is prepared for such an outcome.

More important, I do not believe a currency union that takes for granted the possibility of sovereign defaults and even exit would prove workable. It is a recipe for extreme financial instability, with huge runs on credit to banks, private non-banks and governments built in.

mechanisms of financing and adjustment. Permanent transfers from some countries to others, merely to offset a lack of

competitiveness (rather than accelerate income convergence), are indeed undesirable. Nevertheless, financing needs to be sufficiently large and generous to give vulnerable countries some chance of managing the adjustment to shocks, without sovereign default, mass private bankruptcies and implosion of financial systems.

we find that countries with a larger number of connections in the global network of flows increase their GDP growth by up to 40 percent more than less connected countries do. The penalty for being left behind is rising.

Digital technologies, which reduce the cost of production and distribution, are transforming flows in three ways: through the creation of purely digital goods and services, “digital wrappers” that enhance the value of physical flows, and digital platforms that facilitate cross-border production and exchange.

Developing economies now account for 38 percent of global flows, nearly triple their share in 1990. S

oday, digital technologies enable even the smallest company or solo entrepreneur to be a “micromultinational,” selling and sourcing products, services, and ideas across borders. Individuals can work remotely through online platforms, creating a virtual people flow. Microfinance platforms enable entrepreneurs and social innovators to raise money globally in ever-smaller amounts.

States, not the federal government, regulated securities markets and insurance, leaving little oversight for interstate business.

The 1930s New Deal reforms added more agencies, including the Securities Exchange Commission and the Federal Deposit Insurance Corporation, complicating political oversight by giving them distinctive missions,

Yet, it was the trust companies, lacking access to emergency liquidity that caused the 1907 crisis to erupt and spread to the banks.

the ECB’s direct authority is more encompassing.

The ECB will not be directly involved in crisis management and bank resolution, which will be the responsibility of the national authorities. This autonomy will not be incentive compatible until EU directives are adopted for a unified deposit insurance system and a funded single resolution authority.

Where prices were rigid, as in goods and labour markets, fewer euros meant slow disinflation but rapid contraction in output and a big rise in unemployment.

If there had been no single currency, the northward capital flight would have depreciated peripheral currencies. Had the periphery borrowed in its own currency, that would have imposed losses on its foreign creditors while also boosting its export industry. Had peripheral economies instead borrowed in dollars or deutschmarks their debt burdens would have ballooned with depreciation, potentially pushing banks and sovereigns into default—but the depreciation boost to competitiveness would have remained. Either way, the depreciation of the currency would effectively shrink the value of wealth in the periphery.

Then and now, monetary policy could not persuade frightened people to spend and invest.

The second Keynesian lesson was the need for some international structure to balance surplus and deficit nations.

Europe has responded to the crisis with the very British approach of muddling through, but King predicts it won’t work. Creating a true federal union, while an admirable goal, will be the work of a hundred years; the only quick way for countries to adjust is the breakup of the euro zone. King thinks the euro zone must confront the basic choice between accepting a transfer union or changing the membership of the monetary union. “Muddling through” isn’t a serious option.

Second, if foreign debt is the real problem, the escalating debate about the Reinhart/Rogoff results is irrelevant for the euro crisis. Countries that have their own currency, like the United Kingdom – and especially the United States, which can borrow from foreigners in dollars – do not face a direct financing constraint.

By contrast, in the case of debt owed to foreigners, higher interest rates lead to a welfare loss for the country as a whole, because the government must transfer resources abroad, which usually requires a combination of exchange-rate depreciation and a reduction in domestic expenditure.

But the eurozone’s peripheral countries simply did not have a choice: they had to reduce their deficits, because the foreign capital on which their economies were so dependent was no longer available.