The political economy under monetary union: has the euro made a difference?
Abstract"Economic and monetary union (EMU) has transformed Europe and has created an integrated pan-European economy. Much research has focused on understanding this integration process and what benefits and costs it entails. This paper identifies a political economy channel of EMU as the monetary union implies that member states had to transfer or at least curtail their policy autonomy in several areas, such as monetary policy and fiscal policy. The paper shows that EMU has helped reduce the impact of political shocks on the domestic economy of member states but magnified the transmission of political shocks within the euro area. Equally importantly, economies with weak domestic policies and institutions exhibited a significantly higher sensitivity to domestic political shocks before EMU, but not thereafter. While this may entail that EMU has brought benefits to countries with weaker policies and institutions by insulating them from adverse political developments at home, a potential drawback is that it may provide weaker market discipline for domestic political stability." Copyright (c) CEPR, CES, MSH, 2009.
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Bibliographic InfoArticle provided by CEPR & CES & MSH in its journal Economic Policy.
Volume (Year): 24 (2009)
Issue (Month): (04)
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Other versions of this item:
- Fratzscher, Marcel & Stracca, Livio, 2008. "The political economy under monetary union: has the euro made a difference?," Working Paper Series 0956, European Central Bank.
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
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- Fratzscher, Marcel & Stracca, Livio, 2009. "Does it pay to have the euro? Italy’s politics and financial markets under the lira and the euro," Working Paper Series 1064, European Central Bank.
- JoÃ£o Rebelo Barbosa & Rui Henrique Alves, 2011. "The Euro Area Ten Years after Its Creation: (Divergent) Competitiveness and the Optimum Currency Area Theory," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 58(5), pages 605-629, December.
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