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The Governance of a Fragile Eurozone

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  • Paul De Grauwe

Abstract

When entering a monetary union, member countries change the nature of their sovereign debt in a fundamental way; that is, 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 defaulting. 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 argue that the role of the European Central Bank as a lender of last resort is crucial in reducing the fragility of the Eurozone. In addition, steps toward a budgetary union are key in structurally strengthening the union.
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)

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  • Paul De Grauwe, 2012. "The Governance of a Fragile Eurozone," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 45(3), pages 255-268, September.
  • Handle: RePEc:bla:ausecr:v:45:y:2012:i:3:p:255-268
    DOI: j.1467-8462.2012.00691.x
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    1. Mr. Rabah Arezki & Bertrand Candelon & Mr. Amadou N Sy, 2011. "Sovereign Rating News and Financial Markets Spillovers: Evidence from the European Debt Crisis," IMF Working Papers 2011/068, International Monetary Fund.
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