of the states differ and some were hit harder than others by the 20072009

Of the states differ and some were hit harder than

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of the states differ and some were hit harder than others by the 2007–2009 recession, there is free movement of workers and firms across state borders; federal legislation results in many—but not all—
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rules with respect to labor, taxes, and environmental regulations being consistent across states; and the states share a common language and elect a common national government.oThe countries using the euro are much less harmonized in all these respects and are much more diverse economically, politically, and culturally than are the states of the United States. Some steps have been taken to aid the free flow of workers and firms across national borders, to coordinate some aspects of labor and tax legislation, and so on. In fact, one argument in favor of the euro was that it would aid the harmonization of Europe’s economies.oBut are the countries of Europe so diverse that using a common currency seriously hinders their economies in dealing with economic shocks like a significant recession? The answer may depend in part on whether the countries most affected by the recession can eventually return to higher growth and lower unemployment. Policymakers in Greece, Spain, Portugal, and Ireland—the countries that are perhaps most likely to abandon the euro—do not appear to see much gain from doing so. Abandoning the euro might allow these countries to increase their exports by depreciating their currencies and to spur recovery through expansionary monetary policies. But these actionswould be at the expense of thelong-term advantages these countries gain from the euro. So, while at the end of 2016 the euro was battered, it appeared likely to survive.Currency peggingOne way to maintain a fixed exchange rate is through pegging. Withpegging, a country keeps its exchange rate fixed against another country’s currency. It is not necessary for both countries in a currency peg to agree to it.For example, when in the 1990s, South Korea, Taiwan, Thailand, Indonesia, and other developing countries pegged their currencies to the U.S. dollar, the responsibility for maintaining the peg was entirely with the developing countries. Countries peg their currencies to gain the following advantages of a fixed exchange rate: reduced exchange-rate risk, a check against inflation, and protection for firms that have taken out loans in foreigncurrenciesThis last advantage was important to many Asian countries during the 1990s because some of their firms had begun taking out dollar-denominated loans from U.S. and foreign BanksA peg, though, can run into the problem faced by countries under the Bretton Woods system: A currency’s equilibrium exchange rate, as determined by demand and supply, may be significantly different than the pegged exchange rate. As a result, the pegged currency may become overvalued or undervalued with respect to the dollarIn the 1990s, a number of Asian countries with overvalued currencies were subject to speculative attacks. During the resultingEast Asian currency crisis, these countriesattempted to defend their pegs by buying domestic currency with dollars, reducing their monetary bases, and raising their domestic interest rates. Higher interest
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