This Table From 1994 Perfectly Predicted The Euro Crisis

Even back in the early 1990s, economists knew that peripheral Europe would suffer in a continental currency union.

Econbrowser’s Menzi Chinn posted the following chart from a 1994 paper by Tamim Bayoumi and Barry Eichengreen showing how well countries would perform under a common currency. Says Chinn:

The euro zone was not, and still is not, an optimal currency zone.

The table is of correlations of estimated supply side shocks, obtained using a bivariate SVAR (demand side shocks are also relevant, but would change with the establishment of a euro zone wide central bank.)

Notice that the northern countries fit best into a common currency area, insofar as the correlations exceed 0.40. That is not the case for Italy, Spain, Portugal, and Ireland.


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