Publication

This paper reviews the European Monetary System crisis of the 1990s in order to extract informative parallels with the euro crisis that followed the great recession. In light of these two events, the author argues that countries with a high level of debt seem to have only bad choices: if they enter a monetary union then a speculative attack can force them to default; but if they keep monetary autonomy a speculative attack can force them into high inflation. He concludes that based on experience, the political and economic costs of a formal default are perceived to be much higher than the cost of breaking an exchange rate commitment or allowing higher inflation.