When the euro was launched, countries with typically weaker currencies or fiscal discipline benefited from the discipline
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As investment picked up worldwide in 2003, funds poured into a wide range of countries in the Euro-zone, fueling real estate and construction booms in Ireland and Spain, and financing a wide range of projects in Italy and Greece. As their economies boomed, prices and wages were driven up substantially. But when the investment boom came to a crashing end, these countries needed to make adjustments as their wage and price structure was out of line. But their options were limited because, as members of the Euro-zone, they could not depreciate their currencies. As a result, they were faced with the prospect of either making major budgetary adjustments, cutting spending or raising taxes, or a prolonged period of unemployment to reduce wages and prices. In 2010 Greece faced a major financial crisis as its budgetary imbalance was particularly severe and investors demanded major readjustments. Currency depreciation would have been a much easier solution for Greece in this situation, but this was no longer possible. This is a downside to a single currency for a collection of countries whose economies and political cultures differ sharply
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Macroeconomics Principles Applications And Tools
ISBN: 9780134089034
7th Edition
Authors: Arthur O Sullivan, Steven M. Sheffrin, Stephen J. Perez
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