| 1. A peg is not a common currency/currency union. Critically, you readily come on and off a peg. 2. Various types of gold standards have failed many times in history, including pegs to gold. The reason is almost always the same: countries will overspend no matter what currency they use - wars/militarism are often the excuse. Notable failures include: - helping worsen, if not cause, the US Great Depression (US Fed decided to defend the peg to gold); - helping cause the Weimar German hyperinflation (due to the victors taking almost all the German gold reserves for WWI reparations). 3. Free floating, market-traded fiat currencies solved the core problem of a physical fixed currency like gold. But like gold, they do not, nor can they, prevent governments continuing to overspend. However, they do allow a mechanism to punish them for doing so, i.e. the capital markets! Unfortunately, the capital markets are unable to enforce their own brand of spanking and consolation in this case because there are no individual currencies per government in the Eurozone. So, it has to whip them using the main stick it has left which are the separate sovereign debts, but cannot console them with lower currencies. After leaving these individual sovereign debt markets in droves and therefore causing government borrowing costs for EZ countries to soar to unsustainable levels, everyone in the markets is finally starting to realise there is no upside in being involved in a common currency which is killing its members. Locked in a sub-optimal currency area, unable to raise affordable funds, unable to devalue currency, forced to reduce debt levels by austerity, no ability to import inflation (which would reduce real level of debts) because the world economy is entering a downturn, no fiscal union therefore no fiscal transfers, uncompetitive industries and low productivity due to decades of binge spending, therefore low or negative growth outlook... This is a painful way for any sovereign to live and at some point something has to give! |