The political economy under monetary union: has the euro made a difference?
AbstractEconomic 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 a weaker track record in terms of economic and institutional quality 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 a weaker economic and institutional stability by insulating them from adverse political developments at home, a potential drawback is that it may provide weaker market discipline for domestic political stability. JEL Classification: F31, F33, G14
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Bibliographic InfoPaper provided by European Central Bank in its series Working Paper Series with number 0956.
Date of creation: Nov 2008
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Other versions of this item:
- Marcel Fratzscher & Livio Stracca, 2009. "The political economy under monetary union: has the euro made a difference?," Economic Policy, CEPR & CES & MSH, vol. 24, pages 307-348, 04.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-12-01 (All new papers)
- NEP-CBA-2008-12-01 (Central Banking)
- NEP-EEC-2008-12-01 (European Economics)
- NEP-MAC-2008-12-01 (Macroeconomics)
- NEP-MON-2008-12-01 (Monetary Economics)
- NEP-POL-2008-12-01 (Positive Political Economics)
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