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By Simon Johnson Last weekend official Washington was gripped by euphoria, at least briefly, as people attending the IMF annual meetings began to talk about how much money it would take to stabilize the situation in Europe.
High debt levels, house price booms, uncompetitive labour markets – the list of possible reasons why some European countries are facing the wrath of the market are many. This column argues that they all boil down to one measure – inflation. Using the inflation differentials as a guide is the first step to seeing what countries need to adjust – and by how much. The euro was created on the premise that no extreme country-specific imbalance would ever pose a threat to the stability of the common currency area. An intergovernmental covenant on the Stability and Growth Pact was considered, on its own, to be sufficient. But recent crises in euro bond markets have highlighted the structural problems and the deficiencies of the euro architecture.
Michele Tantussi/Bloomberg via Getty Images German Chancellor Angela Merkel and Portuguese Prime Minister Pedro Passos Coelho, Berlin, September 1, 2011 The euro crisis is a direct consequence of the crash of 2008.
The future of the Euro