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The euro has brought a balance-of-payments crisis to Europe, just as the gold standard did in the 1920s. Only one difference exists between the two episodes: In today’s crisis, huge international rescue packages have been available.

These rescue packages have relieved the eurozone’s financial distress, but at a high cost. Not only have they enabled investors to avoid paying for their poor decisions; they have also given overpriced southern European countries the opportunity to defer real depreciation in the form of a reduction of relative prices of goods. This is necessary to restore the competitiveness that was destroyed in the euro’s initial years, when it caused excessive inflation.

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