Flawed Currency Areas and Viable Currency Areas: External Imbalances and Public Finance in the Time of the Euro

The main problem discussed in this paper is whether a balance of payments constraint exists within the Euro area. It is argued that the question of a member state’s foreign position is still relevant, at difference from what happens in successful currency areas like the USA, where persistent imbalances in the payments from one dis- trict to another are acceptable and are made sustainable by financial transfers revolving around the system of taxes and transfers and the public debt. Persistent imbalances in payments between regions within the area are to be settled in either the common currency or (which is basically the same thing) the public debt. But while this is acceptable in the USA, it is far from acceptable in the Euro area, where creditor countries (Germany being by far the most important) clamour for a settlement in ‘hard assets’, like, e.g. state-owned real estate, if not gold. This means that a balance of payments constraint still binds state members of the Euro area, and is a serious threat to its survival.