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The known unknowns and the unknown unknowns of the EMU

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  • Jean Pisani-Ferry

Abstract

Extensive prior research on the economics of European monetary union highlighted some potential risks (the known unknowns) but overlooked others (the unknown unknowns). Asymmetries among participating countries, the potentially destabilising character of a one-size-fits all monetary policy, the weakness of adjustment mechanisms, the lack of incentives for fiscal discipline, the possibility of sovereign solvency crises and their adverse consequences were all known and understood. But policymakers often relied on a complacent reading of the evidence. â?¢ The potential for financial disruption was vastly underestimated. Economists generally did not consider, or underestimated, the possibility of balance of payment crises such as those experienced by southern European countries, or the risk of a feedback loop between banks and sovereigns. â?¢ Remedying EMUâ??s systemic deficiencies is on the policy agenda. Banking union would go a long way towards addressing the fault lines. The urgent question for economists is if it is going to be enough and, if not, what else should complement the â??bare-bonesâ?? EMU of Maastricht. This Policy Contribution is based on a keynote address at the conference The European Sovereign Debt Crisis: Background and Perspectives, held at the Danish National Bank on 13-14 April 2012.

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Paper provided by Bruegel in its series Policy Contributions with number 756.

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Date of creation: Oct 2012
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Handle: RePEc:bre:polcon:756

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  1. Silvia Merler & Jean Pisani-Ferry, 2012. "Sudden stops in the euro area," Policy Contributions 718, Bruegel.
  2. Hofmann, Boris & Remsperger, Hermann, 2005. "Inflation differentials among the Euro area countries: Potential causes and consequences," Journal of Asian Economics, Elsevier, vol. 16(3), pages 403-419, June.
  3. Asdrubali, Pierfederico & Sorensen, Bent E & Yosha, Oved, 1996. "Channels of Interstate Risk Sharing: United States 1963-1990," The Quarterly Journal of Economics, MIT Press, vol. 111(4), pages 1081-1110, November.
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Cited by:
  1. Mario Sarcinelli, 2013. "The European Banking Union: Will It Be a True Union without Risk Sharing?," PSL Quarterly Review, Economia civile, vol. 66(265), pages 137-167.
  2. Mario Sarcinelli, 2013. "L'unione bancaria europea e la stabilizzazione dell'Eurozona," Moneta e Credito, Economia civile, vol. 66(261), pages 7-42.

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