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The Eurozone needs exit rules

  • Fahrholz, Christian
  • Wójcik, Cezary

This study 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 complete but imperfect information. To get close to the essence of the current EZ sovereign debt crisis we analyse to what extent a ‘troubled’ periphery member can negotiate a bailout from the centre due to the existence of a negative externality arising from its potential default. Secondly, we analyse how establishing ‘exit rules’ would shift the centre-periphery relationship in a way that safeguards the stability of the EZ. We demonstrate that such rules may help limit the scope for brinkmanship whereby fiscal problems in one member state create a negative externality for the rest of the EZ. We then discuss key policy implications concerning financial aspects of the centre-periphery relationship within the EZ.

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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 37 (2013)
Issue (Month): 11 ()
Pages: 4665-4674

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Handle: RePEc:eee:jbfina:v:37:y:2013:i:11:p:4665-4674
DOI: 10.1016/j.jbankfin.2013.05.016
Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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  1. Wildasin, David E., 1997. "Externalities and bailouts : hard and soft budget constraints in intergovernmental fiscal relations," Policy Research Working Paper Series 1843, The World Bank.
  2. Beetsma, Roel & Giuliodori, Massimo, 2009. "The Macroeconomic Costs and Benefits of the EMU and other Monetary Unions: An Overview of Recent Research," CEPR Discussion Papers 7500, C.E.P.R. Discussion Papers.
  3. Christian Fahrholz & Cezary Wójcik, 2010. "The Bail-Out! Positive Political Economics of Greek-type Crises in the EMU," CESifo Working Paper Series 3178, CESifo Group Munich.
  4. repec:kap:iaecre:v:17:y:2011:i:3:p:334-346 is not listed on IDEAS
  5. Backé, Peter & Wójcik, Cezary, 2008. "Credit booms, monetary integration and the new neoclassical synthesis," Journal of Banking & Finance, Elsevier, vol. 32(3), pages 458-470, March.
  6. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 661465000000000387, David K. Levine.
  7. Michael G. Arghyrou & John D. Tsoukalas, 2010. "The Greek Debt Crisis: Likely Causes, Mechanics and Outcomes," CESifo Working Paper Series 3266, CESifo Group Munich.
  8. Ludger Schuknecht & Albert Jaeger, 2004. "Boom-Bust Phases in Asset Prices and Fiscal Policy Behavior," IMF Working Papers 04/54, International Monetary Fund.
  9. Steffen Huck & Justin Mattias Valasek, 2013. "Institutionalizing Eurozone Exit: A Modified NEWNEY Approach," CESifo Working Paper Series 4116, CESifo Group Munich.
  10. Jakob von Weizsäcker & Jacques Delpla, 2010. "The Blue Bond Proposal," Policy Briefs 403, Bruegel.
  11. Nash, John, 1953. "Two-Person Cooperative Games," Econometrica, Econometric Society, vol. 21(1), pages 128-140, April.
  12. Michael D. Bordo & Lars Jonung, 1999. "The Future of EMU: What Does the History of Monetary Unions Tell Us?," NBER Working Papers 7365, National Bureau of Economic Research, Inc.
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