The Eurozone Needs Exit Rules
AbstractThis paper argues that the key issue for defining and solving the Eurozone’s (EZ) difficulties lies in readjusting the relationship between the centre and the periphery of the EZ. Our argument proceeds in two steps. Firstly, the basic finance problem of a centre-periphery system is captured by a threat game with perfect but incomplete information. To get close to the essence of today’s crisis we analyze to what extent a ‘troubled’ periphery EZ member can negotiate a bailout from the center due to the existence of a negative externality arising from its potential default. Secondly, we analyze how establishing ‘exit rules’, which have recently also been advocated by Jacques Delors, would shift the centre-periphery relationship in a way that safeguard the stability of the EZ. We demonstrate that such rules may help limiting the scope for brinkmanship whereby fiscal problems in one member create a negative externality for the rest of the EZ. We show that such rules will strengthen the EZ through at least four channels.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3845.
Date of creation: 2012
Date of revision:
sovereign debt crisis; Eurozone; Euro; exit rules; bail-out; political economics; game theory;
Other versions of this item:
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
- H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
- C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
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