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I'll echo Frank's skepticism of the practicality of a currency "reset" compared to simply dismantling the Euro (which is not the same as dismantling the EU!). Absent a Eurobancor or (what comes to the same thing) unlimited ECB defense of the new exchange rate, such a reset will be prima facie incredible. For all the same reasons that a devaluation within a fixed-rate system is incredible. Whereas with a Eurobancor or unlimited ECB defense of the new exchange rate, the immediate problem would be solved without the need for a currency reset.

This sort of periodic exchange rate adjustments could work under the Bretton Woods system, because the Bretton Woods system had limited convertibility. There were explicit controls on your ability to exchange currency, which prevents the sort of wholesale speculative attack Soros pulled off in '92/3.

The Scandinavian experience with devaluation in the 1970s is instructive in this regard, in no small part for the contrast it provides: Denmark devalued repeatedly without exiting the exchange rate mechanism, while Sweden exited their exchange rate peg and let their currency depreciate. I can look up the relevant macroeconomic indicators for the period if there is an interest in this, but the overall picture is that Denmark spent a lot of effort and economic dislocation attempting to defend each successive (and successively less credible) peg, while the cost to Sweden was merely a period of moderate inflation.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Apr 9th, 2012 at 10:23:40 AM EST

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