Practice question · Multiple choice
Greece could not devalue during the euro crisis and had to deflate wages instead. Which design feature made that the only path?
Hints
- Ask what a country outside the euro would have done, and why Greece could not.
- Cutting every wage by 20% and devaluing by 20% aim at the same thing. Which is achievable?
Show the answer
C. A shared currency without shared fiscal capacity
Why
A devaluation cuts every price relative to abroad at once; doing it wage by wage takes years and mass unemployment to enforce. Mundell's optimum-currency-area criteria, labour mobility and fiscal transfers, name exactly what the euro area lacked, and the crisis was that theory being tested.
Practise European Integration and the Euro
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