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EMU: The Sustainability Issue

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  • Frederic Teulon

Abstract

The euro area is experiencing a sovereign debt crisis; as a result, the foundations of its monetary union have been shattered. This crisis, which is an extension of an international financial crisis, shows that the European Union is not an optimum currency area. Robert Mundell’s work remains an indispensable reference on this subject: a monetary union among greatly different countries and propelled by considerably weak solidarity is problematic. In the present context, the possibilities are limited for permanently improving the situation, for transforming sovereign debts into sustainable ones, and for regaining a higher level of growth. Experience seems to show that a single currency cannot accommodate national budgetary policies and that national policies are hindered by the existence of a single currency in a context of asymmetries. Eventually, a scenario where the euro area would collapse becomes highly probable. This paper puts forward a model of debt sustainability and discusses eight related proposals.

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Bibliographic Info

Paper provided by Department of Research, Ipag Business School in its series Working Papers with number 2014-196.

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Length: 12 pages
Date of creation: 28 Mar 2014
Date of revision:
Handle: RePEc:ipg:wpaper:2014-196

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Related research

Keywords: European Monetary Union; European Central Bank (EBC); Eurozone; Stability growth pact; Financial crisis; Fiscal policy and debt sustainability; Optimal currency area; Sovereign debt;

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  1. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  2. Cukierman, A. & Lippi, F., 1998. "Central Bank Independence, Centralization of Wage Bargaining, Inflation and Unemployment - Theory and Some Evidence," Discussion Paper 1998-116, Tilburg University, Center for Economic Research.
  3. Martin Feldstein, 1997. "The Political Economy of the European Economic and Monetary Union: Political Sources of an Economic Liability," Journal of Economic Perspectives, American Economic Association, vol. 11(4), pages 23-42, Fall.
  4. Paul Krugman, 1990. "Increasing Returns and Economic Geography," NBER Working Papers 3275, National Bureau of Economic Research, Inc.
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Cited by:
  1. Jean Messiha & Bruno-Laurent Moschetto & Frederic Teulon, 2014. "How to switch off the cypriot financial crisis without weakening durably Europe ?," Working Papers 2014-169, Department of Research, Ipag Business School.

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