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A Fragile Eurozone in Search of a Better Governance

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  • Paul De Grauwe
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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 analyze the implications of this fragility for the governance of the Eurozone. I conclude that the new governance structure (ESM) does not sufficiently recognize 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 stabilizers 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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    Bibliographic Info

    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3456.

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    Date of creation: 2011
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    Handle: RePEc:ces:ceswps:_3456

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    Keywords: Eurozone; multiple equilibria; governance;

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    Cited by:
    1. Gärtner, Manfred & Griesbach, Björn, 2012. "Rating agencies, self-fulfilling prophecy and multiple equilibria? An empirical model of the European sovereign debt crisis 2009-2011," Economics Working Paper Series 1215, University of St. Gallen, School of Economics and Political Science.
    2. Spahn, Peter, 2012. "Integration durch Währungsunion? Der Fall der Euro-Zone," FZID Discussion Papers 57-2012, University of Hohenheim, Center for Research on Innovation and Services (FZID).
    3. Alfredo Bardozzetti & Davide Dottori, 2013. "Collective action clauses: how do they weigh on sovereigns?," Temi di discussione (Economic working papers) 897, Bank of Italy, Economic Research and International Relations Area.
    4. Matthias Bank & Alexander Kupfer & Rupert Sendlhofer, 2011. "Performance-sensitive government bonds - A new proposal for sustainable sovereign debt management," Working Papers 2011-24, Faculty of Economics and Statistics, University of Innsbruck.

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