<blockquote>
  <p>Is the only benefit to fluctuating currency rates that it means some people make a lot of money by trading currencies, with zero appreciable benefit to humanity at large ?</p>
</blockquote>

<p>No. The main benefit of flexible exchange rates is that <a href="https://en.wikipedia.org/wiki/Balance_of_payments#Rebalancing_by_changing_the_exchange_rate" rel="nofollow noreferrer">it allows the currencies to adjust to imbalances in the balance of payments between countries</a>, itself a result of real economic differences:</p>

<blockquote>
  <p>An upwards shift in the value of a nation's currency relative to others will make a nation's exports less competitive and make imports cheaper and so will tend to correct a current account surplus. It also tends to make investment flows into the capital account less attractive so will help with a surplus there too. Conversely a downward shift in the value of a nation's currency makes it more expensive for its citizens to buy imports and increases the competitiveness of their exports, thus helping to correct a deficit (though the solution often doesn't have a positive impact immediately due to the Marshall–Lerner condition). [...]</p>
  
  <p>When a country is importing more than it exports, the supply of its own currency on the international market tends to increase as it tries to exchange it for foreign currency to pay for its imports, and this extra supply tends to cause the price to fall. BoP effects are not the only market influence on exchange rates however, they are also influenced by differences in national interest rates and by speculation.</p>
</blockquote>

<p>Some economists think that some level of buffering by the central banks of exchange rates is necessary though, because exchange rates are vulnerable to speculative because they tend to converge too slowly to their "real" value. (The latter is sometimes called the <a href="https://www.nber.org/papers/w22198" rel="nofollow noreferrer">PPP puzzle</a>.) </p>

<p>When central banks work to affect the exchange rate without changing the money supply, it' called a <a href="https://www.minneapolisfed.org/research/qr/qr1032.pdf" rel="nofollow noreferrer">"sterilized intervention"</a>. It's somewhat controversial whether these <a href="https://www.imf.org/external/pubs/ft/wp/2013/wp1311.pdf" rel="nofollow noreferrer">work as intended</a> or <a href="https://www.clevelandfed.org/en/newsroom-and-events/publications/working-papers/working-papers-archives/2001-working-papers/wp-0110-sterilized-intervention--nonsterilized-intervention--and-monetary-policy.aspx" rel="nofollow noreferrer">not</a>.</p>

<p>Also, a pegged system largely exports one country's (the biggest one, economically) monetary policy to the rest. This causes substantial problems if these other economies <a href="https://en.wikipedia.org/wiki/Optimum_currency_area" rel="nofollow noreferrer">are dissimilar</a>.  </p>

<p>This implicit export of monetary policy via (nearly) fixed exchange rates is thought to be a key reason why the Bretton Woods system (which nearly achieved what you ask for), <a href="https://voxeu.org/article/operation-and-demise-bretton-woods-system" rel="nofollow noreferrer">eventually failed</a>:</p>

<blockquote>
  <p>Increasing US monetary growth led to rising inflation, which spread to the rest of the world through growing US balance of payments deficits. This led to growing balance of payments surpluses in Germany and other countries. The German monetary authorities (and other surplus countries) attempted to sterilise the inflows but were eventually unsuccessful, leading to growing inflationary pressure (Darby et al. 1983). [...]</p>
  
  <p>The decision to suspend gold convertibility by President Richard Nixon on 15 August 1971 was triggered by French and British intentions to convert dollars into gold in early August. The US decision to suspend gold convertibility ended a key aspect of the Bretton Woods system. The remaining part of the System, the adjustable peg disappeared by March 1973.</p>
  
  <p>A key reason for Bretton Woods’ collapse was the inflationary monetary policy that was inappropriate for the key currency country of the system. The Bretton Woods system was based on rules, the most important of which was to follow monetary and fiscal policies consistent with the official peg. The US violated this rule after 1965 (Bordo 1993).</p>
</blockquote>

<p>N.B. The Bretton Woods minus the gold standard, thus only a nearly fixed exchanged system (but not backed by gold) is sometimes called the <a href="https://en.wikipedia.org/wiki/Smithsonian_Agreement" rel="nofollow noreferrer">Smithsonian Agreement</a>. It lasted between 1971-1973. Without a change in US monetary policy (which didn't really happen) <a href="https://www.federalreservehistory.org/essays/smithsonian_agreement" rel="nofollow noreferrer">it couldn't have possibly worked</a>:</p>

<blockquote>
  <p>At the Smithsonian meeting, the United States agreed to devalue the dollar against gold by approximately 8.5 percent to $38 per ounce. Other countries offered to revalue their currencies relative to the dollar. The net effect was roughly a 10.7 percent average devaluation of the dollar against the other key currencies (de Vries 1976, 555).</p>
  
  <p>At the Smithsonian meeting, countries also agreed to future talks on broader reforms of the international monetary system. Issues that would be discussed included the central role of the dollar, shared responsibility for exchange-rate stability, the future role of gold, a means for easing exchange-rate adjustment, and measures to deal with volatile financial flows. Foreign nations also agreed to comply with Nixon’s request to lessen existing trade restrictions and to assume a greater share of the military burden.</p>
  
  <p>The Smithsonian Agreement did little to restore confidence in the Bretton Woods system. During 1972, speculators pushed many European currencies toward the tops of their permissible—but now wider—exchange-rate bands. By intervening, their central banks accumulated large amounts of unwanted dollars, which stoked inflationary pressures. Germany and Japan expanded their restraints on financial flows, and other countries began to follow suit.</p>
  
  <p>Gold prices, a barometer of uncertainty, rose to around \$60 an ounce by mid-1972 and $90 an ounce by early 1973. Speculation was rife. On February 12, 1973, with exchange markets in Europe and Japan closed, the United States devalued the dollar by an additional 10 percent to \$42 an ounce. When markets reopened, speculation against the dollar became rampant. Within a month nearly all major currencies were floating against the dollar. The Bretton Woods system was finished (IMF 1973, 2-8).</p>
</blockquote>

<p>As you can see, (nearly) fixed exchange rates encourage rather then discourage 
speculation, when there is an imbalance of payments.</p>

<p>Now if you want to talk about erasing different currencies altogether, the imbalance of payments problem doesn't disappear but becomes a <a href="https://voxeu.org/article/balance-payments-adjustment-eurozone" rel="nofollow noreferrer">"persistent imbalance"</a> in development, taking the EU as an example:</p>

<blockquote>
  <p>As a monetary union based on a single currency, the Eurozone was supposed to be immune from these problems, as exchange-rate risks would vanish and payment disequilibria within the area would be smoothly offset by private capital flows (James 2012). These expectations proved delusional; the sovereign debt crisis in the Eurozone in 2010-12 started as a fully-fledged balance-of-payments crisis (<a href="https://voxeu.org/sites/default/files/file/Policy%20Insight%2085.pdf" rel="nofollow noreferrer">Baldwin et al. 2015</a>), prompted by the accumulation of large payment imbalances between its members and reflecting persistent underlying divergences in prices and costs. [...]</p>
  
  <p>In sum, Germany has emerged as a kind of real economic anchor of the Eurozone, forcing its preference for high savings and slow growth of domestic demand onto the other members. However, this slow growth is incompatible with the need to reduce debt and reabsorb much higher unemployment and social distress. At the same time, very low inflation further compresses the margin for change in relative prices and wages.</p>
</blockquote>

<p>And if the Eurozone (EZ) crisis needs more explaining, from Baldwin et al.:</p>

<blockquote>
  <p>The core reality behind virtually every crisis is the
  rapid unwinding of economic imbalances. In the
  case of the EZ Crisis, the imbalances were extremely
  unoriginal – too much public and private debt
  borrowed from abroad. From the euro’s launch till
  the Crisis, there were big capital flows from EZ core
  nations like Germany, France, and the Netherland
  to EZ periphery nations like Ireland, Portugal,
  Spain and Greece. [...]</p>
  
  <p>All the nations stricken by the Crisis
  were running current account deficits. None of
  those running current account surpluses were hit.
  When the EZ Crisis started, there was a ‘sudden stop’
  in cross-border lending. Investors became reluctant
  to lend – especially to banks and governments in
  other nations. The special features of a monetary
  union meant that the ‘sudden stop’ was not
  precipitous (as it was, for example, in Iceland).
  Rather this ‘sudden stop with monetary-union
  characteristics’ showed up in rising risk premiums.
  The abrupt end of capital flows raised concerns
  about the viability of banks and governments in
  nations dependent on foreign lending, i.e. those
  running current account deficits.</p>
</blockquote>

<p>(If you care about Nobel lustre, <a href="https://en.wikipedia.org/wiki/Christopher_A._Pissarides" rel="nofollow noreferrer">Pissarides</a> is one of the co-authors of that last paper.)</p>

<p>Finally, <a href="http://ec.europa.eu/economy_finance/publications/economic_paper/2013/ecp492_en.htm" rel="nofollow noreferrer">Gros and Alcidi</a> discuss the finer differences between a hard peg (fixed exchange) and a monetary union in fairly similar economic circumstances... with a naturalistic example for the former: the BELL countries, i.e. Bulgaria, Estonia, Latvia and Lithuania (which had or have a hard peg to the Euro while not being part of the Eurozone--actually Estonia joined the Eurozone in the period under investigation). It's a little too detailed to get into that here. But as a general idea:</p>

<blockquote>
  <p>From a macroeconomic point of view, there should be little difference between a monetary union and a hard peg (e.g. a currency board). There is no national monetary policy autonomy in either case and the constraint on fiscal or budgetary policy should also be essentially the same in the long run.</p>
  
  <p>In fact, however, one difference still exists. In the case of a currency board, the country can break its
  commitment to keep the exchange rate fixed without causing any problems for the country to whom the currency had been pegged (the collapse of the peg of the Argentine peso to the US dollar had no impact on the
  confidence in the dollar). However, in the case of the euro, the exit of any country would have a profound
  impact on the other member states of the currency area.</p>
</blockquote>

<p>The latter event is hypothetical as we have no historical examples as far the Euro goes, but there certainly has been <a href="https://en.wikipedia.org/wiki/Withdrawal_from_the_Eurozone#Economic_considerations" rel="nofollow noreferrer">no shortage of opinions on the matter</a>.</p>

CC BY-SA 4.0
2019-04-23T04:13:04.400Z
Lordy, thanks so much for such a detailed reply, which if I'm honest, took several goes to attempt to digest but it's well beyond me in the main. (I wish hitting enter stopped saving my comment). So the main morsel I get from that is that the fluctuating rates can act as a dampening effect to bring things back to some form of equity when a currency is straying from its 'true' value (obviously that being a nebulous concept in itself). So there is a beneficial effect there. You suggest that if this happens too quickly that can be bad too (the 'EZ crisis'). I will have another go at reading this.
Chris of the Coffee
CC BY-SA 4.0
2019-04-23T04:23:12.907Z
I'm naturally suspicious of any idea of a single currency worldwide, which fixed rates across the board would effectively implement, but can't help feeling it'd be better for humanity. However, like many sciences, what seems makes sense or feels right to the layman may well be a terrible idea. The subject came to me when I was mulling why, with notable exceptions, those who invent and create always seem to end up way poorer than those that exploit and market. Thanks again for your super-detailed reply, it's much appreciated, if not greatly understood by me.
Chris of the Coffee
CC BY-SA 4.0
2019-04-22T22:59:13.863Z
2019-04-23T00:52:38.320Z
2019-04-23T00:52:38.320Z
fantastic peace and prosperity
<p>Assuming one had the power to enact such a wide-ranging change, what would the negative effects of fixing the exchange rates between all currencies at the current rates, or the mean of the last week/month/year/whatever?</p>

<p>The specific rates settled on are not the point of the question, nor how this could possibly come about. The crux of it is, how might this change to global finance harm human beings?</p>

<p>Clearly, those companies and private individuals that make a living by shifting money around would no longer be able to do so. This is a given, no need to expand on that effect which many (including me) might consider a benefit and is to a great extent, the reason I'm asking.</p>

<p>The question is, vested interests of a tiny minority who exploit the changing rates aside, why might this be a bad thing to happen?</p>

<p>Another way of putting it might be; Is the only benefit to fluctuating currency rates that it means some people make a lot of money by trading currencies, with zero appreciable benefits to humanity at large?</p>

CC BY-SA 4.0
2019-04-22T08:32:53.367Z
See [Why does changing the value a currency help/hurt exports if sellers can just inflate/deflate prices to match the change?](https://economics.stackexchange.com/questions/21676/why-does-changing-the-value-a-currency-help-hurt-exports-if-sellers-can-just-inf) and [Why does a currency devaluation make a country more attractive for foreign direct investment?](https://economics.stackexchange.com/questions/8329/why-does-a-currency-devaluation-make-a-country-more-attractive-for-foreign-direc)
Giskard
CC BY-SA 4.0
2019-04-22T08:36:05.900Z
as well as [Why do low labour and wage flexibility forestall a single currency?](https://economics.stackexchange.com/questions/27849/why-do-low-labour-and-wage-flexibility-forestall-a-single-currency)
Giskard
CC BY-SA 4.0
2019-04-22T09:20:18.440Z
Thanks for both pointers, read all 3 references to the best of my ability but no wiser about my question. Perhaps I should have added 'Please answer for consumption by business/finance idiot' - my head becomes numb after a few sentences about fiscal matters, genuine question though, am interested in the answer not just trying to make a point.
Chris of the Coffee
CC BY-SA 4.0
2019-04-22T10:24:19.670Z
If there is a declared fixed exchange rate, say between the Venezuelan bolívar and the US dollar, and I have bolívares but want dollars to import some goods, I need to exchange my currency.  The US Federal Reserve will not sell me any dollars because they do not want bolívares. The Venezuelan Central Bank will not sell me dollars because they do not have any, having already sold to others.  Money changers on the street will not sell me dollars at the fixed exchange rate because the demand from others in the same position is too great.
Henry
CC BY-SA 4.0
2019-04-22T11:17:45.493Z
Thanks, I see what you mean. Though if the rates were fixed there'd be no need to sell or buy currencies. You'd send X bolivars from your Venezuelan account to the USD account of the seller, it'd show up in their account as Y dollars depending on the rate. The only difference between currencies would be the physical notes, in the computers where the vast majority of money is, it's just a bunch of numbers. Accepted there'd be some logistics in repatriating excess notes to their originating countries when people took cash across borders, so there's a logistical thing to do there.
Chris of the Coffee
CC BY-SA 4.0
2019-04-22T11:28:56.577Z
Oh, and money changers on the street would just charge a commission for the service.
Chris of the Coffee
CC BY-SA 4.0
2019-04-22T14:08:36.957Z
"if the rates were fixed" Fixed by whom? You should probably start reading with the https://en.wikipedia.org/wiki/Bretton_Woods_system
fantastic peace and prosperity
CC BY-SA 4.0
2019-04-22T18:32:52.523Z
Would this not be equivalent to switching to a single world currency?
Vality
CC BY-SA 4.0
2019-04-24T08:02:06.223Z
Fixed by whom ? - aliens, or Gandalf perhaps.. that's why my question began 'Assuming one had the power' - clearly nobody does. Yep, differently styled local notes and coins aside, it would essentially mean a single currency, yes.
Chris of the Coffee
<exchange-rates><foreign-exchange>
What negative effects would result from globally fixing currency exchange rates?
Chris of the Coffee
# What negative effects would result from globally fixing currency exchange rates?

(Asked by: username_0 on 2019-04-22)

Assuming one had the power to enact such a wide-ranging change, what would the negative effects of fixing the exchange rates between all currencies at the current rates, or the mean of the last week/month/year/whatever?

The specific rates settled on are not the point of the question, nor how this could possibly come about. The crux of it is, how might this change to global finance harm human beings?

Clearly, those companies and private individuals that make a living by shifting money around would no longer be able to do so. This is a given, no need to expand on that effect which many (including me) might consider a benefit and is to a great extent, the reason I'm asking.

The question is, vested interests of a tiny minority who exploit the changing rates aside, why might this be a bad thing to happen?

Another way of putting it might be; Is the only benefit to fluctuating currency rates that it means some people make a lot of money by trading currencies, with zero appreciable benefits to humanity at large?

**Tags:** exchange-rates, foreign-exchange

> **Comments:**
> **username_1**: See [Why does changing the value a currency help/hurt exports if sellers can just inflate/deflate prices to match the change?](https://economics.stackexchange.com/questions/21676/why-does-changing-the-value-a-currency-help-hurt-exports-if-sellers-can-just-inf) and [Why does a currency devaluation make a country more attractive for foreign direct investment?](https://economics.stackexchange.com/questions/8329/why-does-a-currency-devaluation-make-a-country-more-attractive-for-foreign-direc)  
> **username_1**: as well as [Why do low labour and wage flexibility forestall a single currency?](https://economics.stackexchange.com/questions/27849/why-do-low-labour-and-wage-flexibility-forestall-a-single-currency)  
> **username_0**: Thanks for both pointers, read all 3 references to the best of my ability but no wiser about my question. Perhaps I should have added 'Please answer for consumption by business/finance idiot' - my head becomes numb after a few sentences about fiscal matters, genuine question though, am interested in the answer not just trying to make a point.  
> **username_2**: If there is a declared fixed exchange rate, say between the Venezuelan bolívar and the US dollar, and I have bolívares but want dollars to import some goods, I need to exchange my currency.  The US Federal Reserve will not sell me any dollars because they do not want bolívares. The Venezuelan Central Bank will not sell me dollars because they do not have any, having already sold to others.  Money changers on the street will not sell me dollars at the fixed exchange rate because the demand from others in the same position is too great.  
> **username_0**: Thanks, I see what you mean. Though if the rates were fixed there'd be no need to sell or buy currencies. You'd send X bolivars from your Venezuelan account to the USD account of the seller, it'd show up in their account as Y dollars depending on the rate. The only difference between currencies would be the physical notes, in the computers where the vast majority of money is, it's just a bunch of numbers. Accepted there'd be some logistics in repatriating excess notes to their originating countries when people took cash across borders, so there's a logistical thing to do there.  
> **username_0**: Oh, and money changers on the street would just charge a commission for the service.  
> **username_3**: "if the rates were fixed" Fixed by whom? You should probably start reading with the https://en.wikipedia.org/wiki/Bretton_Woods_system  
> **username_4**: Would this not be equivalent to switching to a single world currency?  
> **username_0**: Fixed by whom ? - aliens, or Gandalf perhaps.. that's why my question began 'Assuming one had the power' - clearly nobody does. Yep, differently styled local notes and coins aside, it would essentially mean a single currency, yes.  

---

## 1 answers

### Answer by username_3 on 2019-04-22. Score: 3

> Is the only benefit to fluctuating currency rates that it means some people make a lot of money by trading currencies, with zero appreciable benefit to humanity at large ?

No. The main benefit of flexible exchange rates is that [it allows the currencies to adjust to imbalances in the balance of payments between countries](https://en.wikipedia.org/wiki/Balance_of_payments#Rebalancing_by_changing_the_exchange_rate), itself a result of real economic differences:

> An upwards shift in the value of a nation's currency relative to others will make a nation's exports less competitive and make imports cheaper and so will tend to correct a current account surplus. It also tends to make investment flows into the capital account less attractive so will help with a surplus there too. Conversely a downward shift in the value of a nation's currency makes it more expensive for its citizens to buy imports and increases the competitiveness of their exports, thus helping to correct a deficit (though the solution often doesn't have a positive impact immediately due to the Marshall–Lerner condition). [...]
>
> When a country is importing more than it exports, the supply of its own currency on the international market tends to increase as it tries to exchange it for foreign currency to pay for its imports, and this extra supply tends to cause the price to fall. BoP effects are not the only market influence on exchange rates however, they are also influenced by differences in national interest rates and by speculation.

Some economists think that some level of buffering by the central banks of exchange rates is necessary though, because exchange rates are vulnerable to speculative because they tend to converge too slowly to their "real" value. (The latter is sometimes called the [PPP puzzle](https://www.nber.org/papers/w22198).)

When central banks work to affect the exchange rate without changing the money supply, it' called a ["sterilized intervention"](https://www.minneapolisfed.org/research/qr/qr1032.pdf). It's somewhat controversial whether these [work as intended](https://www.imf.org/external/pubs/ft/wp/2013/wp1311.pdf) or [not](https://www.clevelandfed.org/en/newsroom-and-events/publications/working-papers/working-papers-archives/2001-working-papers/wp-0110-sterilized-intervention--nonsterilized-intervention--and-monetary-policy.aspx).

Also, a pegged system largely exports one country's (the biggest one, economically) monetary policy to the rest. This causes substantial problems if these other economies [are dissimilar](https://en.wikipedia.org/wiki/Optimum_currency_area).

This implicit export of monetary policy via (nearly) fixed exchange rates is thought to be a key reason why the Bretton Woods system (which nearly achieved what you ask for), [eventually failed](https://voxeu.org/article/operation-and-demise-bretton-woods-system):

> Increasing US monetary growth led to rising inflation, which spread to the rest of the world through growing US balance of payments deficits. This led to growing balance of payments surpluses in Germany and other countries. The German monetary authorities (and other surplus countries) attempted to sterilise the inflows but were eventually unsuccessful, leading to growing inflationary pressure (Darby et al. 1983). [...]
>
> The decision to suspend gold convertibility by President Richard Nixon on 15 August 1971 was triggered by French and British intentions to convert dollars into gold in early August. The US decision to suspend gold convertibility ended a key aspect of the Bretton Woods system. The remaining part of the System, the adjustable peg disappeared by March 1973.
>
> A key reason for Bretton Woods’ collapse was the inflationary monetary policy that was inappropriate for the key currency country of the system. The Bretton Woods system was based on rules, the most important of which was to follow monetary and fiscal policies consistent with the official peg. The US violated this rule after 1965 (Bordo 1993).

N.B. The Bretton Woods minus the gold standard, thus only a nearly fixed exchanged system (but not backed by gold) is sometimes called the [Smithsonian Agreement](https://en.wikipedia.org/wiki/Smithsonian_Agreement). It lasted between 1971-1973. Without a change in US monetary policy (which didn't really happen) [it couldn't have possibly worked](https://www.federalreservehistory.org/essays/smithsonian_agreement):

> At the Smithsonian meeting, the United States agreed to devalue the dollar against gold by approximately 8.5 percent to $38 per ounce. Other countries offered to revalue their currencies relative to the dollar. The net effect was roughly a 10.7 percent average devaluation of the dollar against the other key currencies (de Vries 1976, 555).
>
> At the Smithsonian meeting, countries also agreed to future talks on broader reforms of the international monetary system. Issues that would be discussed included the central role of the dollar, shared responsibility for exchange-rate stability, the future role of gold, a means for easing exchange-rate adjustment, and measures to deal with volatile financial flows. Foreign nations also agreed to comply with Nixon’s request to lessen existing trade restrictions and to assume a greater share of the military burden.
>
> The Smithsonian Agreement did little to restore confidence in the Bretton Woods system. During 1972, speculators pushed many European currencies toward the tops of their permissible—but now wider—exchange-rate bands. By intervening, their central banks accumulated large amounts of unwanted dollars, which stoked inflationary pressures. Germany and Japan expanded their restraints on financial flows, and other countries began to follow suit.
>
> Gold prices, a barometer of uncertainty, rose to around \$60 an ounce by mid-1972 and $90 an ounce by early 1973. Speculation was rife. On February 12, 1973, with exchange markets in Europe and Japan closed, the United States devalued the dollar by an additional 10 percent to \$42 an ounce. When markets reopened, speculation against the dollar became rampant. Within a month nearly all major currencies were floating against the dollar. The Bretton Woods system was finished (IMF 1973, 2-8).

As you can see, (nearly) fixed exchange rates encourage rather then discourage
speculation, when there is an imbalance of payments.

Now if you want to talk about erasing different currencies altogether, the imbalance of payments problem doesn't disappear but becomes a ["persistent imbalance"](https://voxeu.org/article/balance-payments-adjustment-eurozone) in development, taking the EU as an example:

> As a monetary union based on a single currency, the Eurozone was supposed to be immune from these problems, as exchange-rate risks would vanish and payment disequilibria within the area would be smoothly offset by private capital flows (James 2012). These expectations proved delusional; the sovereign debt crisis in the Eurozone in 2010-12 started as a fully-fledged balance-of-payments crisis ([Baldwin et al. 2015](https://voxeu.org/sites/default/files/file/Policy%20Insight%2085.pdf)), prompted by the accumulation of large payment imbalances between its members and reflecting persistent underlying divergences in prices and costs. [...]
>
> In sum, Germany has emerged as a kind of real economic anchor of the Eurozone, forcing its preference for high savings and slow growth of domestic demand onto the other members. However, this slow growth is incompatible with the need to reduce debt and reabsorb much higher unemployment and social distress. At the same time, very low inflation further compresses the margin for change in relative prices and wages.

And if the Eurozone (EZ) crisis needs more explaining, from Baldwin et al.:

> The core reality behind virtually every crisis is the
> rapid unwinding of economic imbalances. In the
> case of the EZ Crisis, the imbalances were extremely
> unoriginal – too much public and private debt
> borrowed from abroad. From the euro’s launch till
> the Crisis, there were big capital flows from EZ core
> nations like Germany, France, and the Netherland
> to EZ periphery nations like Ireland, Portugal,
> Spain and Greece. [...]
>
> All the nations stricken by the Crisis
> were running current account deficits. None of
> those running current account surpluses were hit.
> When the EZ Crisis started, there was a ‘sudden stop’
> in cross-border lending. Investors became reluctant
> to lend – especially to banks and governments in
> other nations. The special features of a monetary
> union meant that the ‘sudden stop’ was not
> precipitous (as it was, for example, in Iceland).
> Rather this ‘sudden stop with monetary-union
> characteristics’ showed up in rising risk premiums.
> The abrupt end of capital flows raised concerns
> about the viability of banks and governments in
> nations dependent on foreign lending, i.e. those
> running current account deficits.

(If you care about Nobel lustre, [Pissarides](https://en.wikipedia.org/wiki/Christopher_A._Pissarides) is one of the co-authors of that last paper.)

Finally, [Gros and Alcidi](http://ec.europa.eu/economy_finance/publications/economic_paper/2013/ecp492_en.htm) discuss the finer differences between a hard peg (fixed exchange) and a monetary union in fairly similar economic circumstances... with a naturalistic example for the former: the BELL countries, i.e. Bulgaria, Estonia, Latvia and Lithuania (which had or have a hard peg to the Euro while not being part of the Eurozone--actually Estonia joined the Eurozone in the period under investigation). It's a little too detailed to get into that here. But as a general idea:

> From a macroeconomic point of view, there should be little difference between a monetary union and a hard peg (e.g. a currency board). There is no national monetary policy autonomy in either case and the constraint on fiscal or budgetary policy should also be essentially the same in the long run.
>
> In fact, however, one difference still exists. In the case of a currency board, the country can break its
> commitment to keep the exchange rate fixed without causing any problems for the country to whom the currency had been pegged (the collapse of the peg of the Argentine peso to the US dollar had no impact on the
> confidence in the dollar). However, in the case of the euro, the exit of any country would have a profound
> impact on the other member states of the currency area.

The latter event is hypothetical as we have no historical examples as far the Euro goes, but there certainly has been [no shortage of opinions on the matter](https://en.wikipedia.org/wiki/Withdrawal_from_the_Eurozone#Economic_considerations).

> **Comments:**
> **username_0**: Lordy, thanks so much for such a detailed reply, which if I'm honest, took several goes to attempt to digest but it's well beyond me in the main. (I wish hitting enter stopped saving my comment). So the main morsel I get from that is that the fluctuating rates can act as a dampening effect to bring things back to some form of equity when a currency is straying from its 'true' value (obviously that being a nebulous concept in itself). So there is a beneficial effect there. You suggest that if this happens too quickly that can be bad too (the 'EZ crisis'). I will have another go at reading this.  
> **username_0**: I'm naturally suspicious of any idea of a single currency worldwide, which fixed rates across the board would effectively implement, but can't help feeling it'd be better for humanity. However, like many sciences, what seems makes sense or feels right to the layman may well be a terrible idea. The subject came to me when I was mulling why, with notable exceptions, those who invent and create always seem to end up way poorer than those that exploit and market. Thanks again for your super-detailed reply, it's much appreciated, if not greatly understood by me.  

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