Paul Krugman: Iceland, Ireland, and devaluation denial [Chart]

“One of the big lessons of the euro crisis has been that Milton Friedman was right — not about monetarism, but about the case for flexible exchange rates. When big adjustments in a country’s wages and prices relative to trading partners are necessary, it’s much easier to achieve these adjustments via currency depreciation than via relative deflation — which is one main reason there have been such big costs to the euro. […]

If you look at employment instead, as in the chart, Iceland did far better than Ireland; and Icelandic unemployment similarly shows a much more favorable picture. Less formally, everyone I know who tracked both countries has the sense that the human toll in Iceland was much less than it was in Ireland.

Oh, and if you remember, everyone expected the Icelandic crisis to be much worse, given the incredible scale of the banking overreach […].

I guess I understand the urge to make excuses for the single currency. But the evidence really does suggest that there are important advantages to keeping your own currency.

http://krugman.blogs.nytimes.com/2015/11/27/iceland-ireland-and-devaluation-denial/

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