mmetric shocks and the recessions that often followed them in three primary ways: interest rate adjustment, exchange rate intervention, and fiscal adjustment.” Of these, interest rate adjustment was the most important. The euro, however, makes independent interest rate adjustments impossible, because Euroland’s national central banks surrendered monetary policy authority to the European Central Bank in Frankfurt as of January 1999. There is now a single set of short-term interest rates for all euro participants. Therefore, unless economic shocks hit all eleven countries part of the Economic Monetary Union simultaneously, interest rate adjustments cannot be used to manage them.The second major way in which economies recover from asymmetric shocks is through exchange rate adjustments. Yet for individual countries, the euro eliminates this monetary policy instrument, because the euro is now the common currency for eleven different countries. Therefore, currencies can no longer be devaluated at the national level. Another way in Euroland economies dealt with asymmetric shocks before the euro was through fiscal policy adjustment. Usually, when asymmetric shock send a country into recession, government spending increases. As a result governments go into debt during difficult economic times so that they can spend more money on social programs. Such spending introduces large amounts of money into an economy, increasing consumption and economic growth once again and pushing the economy out of a recession. However, the euro restricts such fiscal stabilizers because members must adhere to the new Stability & Growth Pact, an agreement which requires all Euroland government budget deficits to be less than 3.0 percent of GDP. Therefore, it is evident that the euro has three primary impacts on the ability of countries to respond to asymmetric shocks: “it precludes independent interest rate movements: it prevents curre...
