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7/29/15

EU - A Euro Visionary at the IMF - by Leonid Bershidsky

Maurice Obstfeld, who's just been appointed chief economist for the International Monetary Fund, has followed the common European currency project for decades -- since it was a relatively loose association -- and warned early on about the problems the euro faces today.

 Perhaps if European politicians listen to him now, they will argue less about how to make the currency union work
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Obstfeld, a macroeconomist who has co-authored textbooks with both Kenneth Rogoff and Paul Krugman -- economists on opposite sides of a bitter debate over austerity, government debt and economic growth -- is clearly capable of finding a middle ground. In that sense alone, he's a wise choice for the IMF job. His policy recommendations for Europe, however, have been clear and consistent: If the monetary union is to work, the euro zone needs more integration.

"Europe's Gamble" is what Obstfeld called the union in 1997, not long before the introduction of the euro, in a 300-page paper. This includes a highly readable history of the union, beginning with the European Coal and Steel Community that was formed in 1951 to bind Germany closer to the countries it had invaded, notably France. Obstfeld provides plenty of juicy, long-forgotten tidbits about countries scrambling to meet the common currency criteria: a fiscal deficit as close as possible to 3 percent of gross domestic product, inflation close to that of the member nations with the slowest-rising prices, a debt-to-GDP ratio of 60 percent (or at least strong evidence that it was headed that way).

Profligate Germany, for example, tried and failed to revalue its central bank's gold reserves to book the difference as revenue for its budget and cut the deficit -- even as it tried to keep out shakier Italy, Spain and Portugal for fear they would make the new currency much "softer" than the Deutsche mark.

The paper also contains paragraphs that now read as striking predictions:

Because monetary policy will be geared toward price stabilit
Read more: A Euro Visionary at the IMF - Bloomberg View

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