How the Maastricht Regime Fosters Divergence as Well as Fragility
AbstractThis paper investigates the phenomenon of persistent macroeconomic divergence that has occurred across the eurozone in recent years. Optimal currency area theory would point toward asymmetric shocks and structural factors as the foremost candidate causes. The alternative hypothesis pursued here focuses on the working of the Maastricht regime itself, making it clear that the regime features powerful built-in destabilizers that foster divergence as well as fragility. Supposed adjustment mechanisms actually have turned out to undermine the operation of the currency union by making it less “optimal,” that is, less subject to a "one-size-fits-all" monetary policy and common nominal exchange rate, in view of the resulting business cycle desynchronization and related build-up of financial imbalances. The threats of fragility and divergence reinforce each other. Without regime reform these developments could potentially spiral out of control, threatening the long-term survival of EMU.
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Bibliographic InfoPaper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_460.
Date of creation: Jul 2006
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-08-12 (All new papers)
- NEP-EEC-2006-08-12 (European Economics)
- NEP-FMK-2006-08-12 (Financial Markets)
- NEP-IFN-2006-08-12 (International Finance)
- NEP-MAC-2006-08-12 (Macroeconomics)
- NEP-MON-2006-08-12 (Monetary Economics)
- NEP-PKE-2006-08-12 (Post Keynesian Economics)
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