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A Fragile Eurozone in Search of a Better Governance

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  • PAUL DE GRAUWE

    (University of Leuven)

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    Abstract

    When entering a monetary union, member-countries change the nature of their sovereign debt in a fundamental way, i.e. they cease to have control over the currency in which their debt is issued. As a result, financial markets can force these countries’ sovereigns into default. In this sense member countries of a monetary union are downgraded to the status of emerging economies. This makes the monetary union fragile and vulnerable to changing market sentiments. It also makes it possible that self-fulfilling multiple equilibria arise. I analyse the implications of this fragility for the governance of the Eurozone. I conclude that the new governance structure (ESM) does not sufficiently recognise this fragility. Some of the features of the new financial assistance are likely to increase this fragility. In addition, it is also likely to rip member-countries of their ability to use the automatic stabilisers during a recession. This is surely a step backward in the long history of social progress in Europe. I suggest a different approach to deal with these problems.

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    File URL: http://www.esr.ie/vol43_1/01%20Grauwe.pdf
    File Function: First version,2012
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    Bibliographic Info

    Article provided by Economic and Social Studies in its journal Economic and Social Review.

    Volume (Year): 43 (2012)
    Issue (Month): 1 ()
    Pages: 1–30

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    Handle: RePEc:eso:journl:v:43:y:2012:i:1:p:1-30

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    Web page: http://www.esr.ie

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    References

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    1. Kopf, Christian, 2011. "Restoring financial stability in the euro area," CEPS Papers 4292, Centre for European Policy Studies.
    2. Winkler, Adalbert, 2011. "The joint production of confidence: lessons from nineteenth-century US commercial banks for twenty-first-century Euro area governments," Financial History Review, Cambridge University Press, vol. 18(03), pages 249-276, December.
    3. Rabah Arezki & Bertrand Candelon & Amadou Sy, 2011. "Sovereign Rating News and Financial Markets Spillovers: Evidence from the European Debt Crisis," CESifo Working Paper Series 3411, CESifo Group Munich.
    4. Alasdair Scott & Pau Rabanal & Prakash Kannan, 2009. "Macroeconomic Patterns and Monetary Policy in the Run-Up to Asset Price Busts," IMF Working Papers 09/252, International Monetary Fund.
    5. Calvo, Guillermo A, 1988. "Servicing the Public Debt: The Role of Expectations," American Economic Review, American Economic Association, vol. 78(4), pages 647-61, September.
    6. Peirce, Fabrizia & Micossi, Stefano & Carmassi, Jacopo, 2011. "On the Tasks of the European Stability Mechanism," CEPS Papers 4262, Centre for European Policy Studies.
    7. Bertrand Candelon & Amadou N. R. Sy & Rabah Arezki, 2011. "Sovereign Rating News and Financial Markets Spillovers," IMF Working Papers 11/68, International Monetary Fund.
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    Cited by:
    1. Philip R. Lane, 2012. "The European Sovereign Debt Crisis," Journal of Economic Perspectives, American Economic Association, vol. 26(3), pages 49-68, Summer.
    2. repec:spo:wpecon:info:hdl:2441/eo6779thqgm5r489maqa474kg is not listed on IDEAS
    3. Catherine Mathieu & Henri Sterdyniak, 2012. "Faut-il des règles de politique budgétaire," Documents de Travail de l'OFCE 2012-07, Observatoire Francais des Conjonctures Economiques (OFCE).
    4. Goulas, Eleftherios & Zervoyianni, Athina, 2013. "Growth, deficits and uncertainty: Theoretical aspects and empirical evidence from a panel of 27 countries," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(4), pages 380-392.
    5. Catherine Mathieu & Henri Sterdyniak, 2014. "Redemption ?," Sciences Po publications info:hdl:2441/7gjmt2p0l89, Sciences Po.
    6. repec:spo:wpecon:info:hdl:2441/7gjmt2p0l896bo3oar8rqd4vvr is not listed on IDEAS
    7. repec:spo:wpecon:info:hdl:2441/eo6779thqgm5r489m6u1i2a0o is not listed on IDEAS
    8. André Grjebine, 2013. "L’Eurosystème: un mécanisme de transferts en faveur des pays déficitaires ? Le débat," Sciences Po publications info:hdl:2441/eo6779thqgm, Sciences Po.

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