Rudiger Dornbusch

The battle for the common currency may be remembered as one of the more useless in Europe's history. The euro is hailed as a solution to high unemployment, low growth, and the high costs of welfare states. But the deep budget cuts required before integration are already causing pain and may trigger severe recessions. If the European Monetary Union goes forward, a common currency will eliminate the adjustments now made by nominal exchange rates, and the central bank will control money with an iron fist. Labor markets will do the adjusting, a mechanism bound to fail, given those markets' inflexibility in Europe.