Abstract
•We identify four historical trilemmas that also shape the Euro crisis.•Macroeconomic: fixed exchange rates, capital flows, autonomous monetary policy.•Financial: fixed exchange rates, capital flows, financial stability.•International relations: fixed exchange rates, capital flows, policy independence.•Political economy: fixed exchange rates, capital flows, democratization.
There are some striking similarities between the pre 1914 gold standard and EMU today. Both arrangements are based on fixed exchange rates, monetary and fiscal orthodoxy. Each regime gave easy access by financially underdeveloped peripheral countries to capital from the core countries. But the gold standard was a contingent rule – in the case of an emergency like a major war or a serious financial crisis – a country could temporarily devalue its currency. The EMU has no such safety valve. Capital flows in both regimes fueled asset price booms via the banking system ending in major crises in the peripheral countries. But not having the escape clause has meant that present day Greece and other peripheral European countries have suffered much greater economic harm than did Argentina in the Baring Crisis of 1890.