IDEAS home Printed from
   My bibliography  Save this article

A Fragile Eurozone in Search of a Better Governance



    (University of Leuven)


When entering a monetary union, member-countries change the nature of their sovereign debt in a fundamental way, i.e. 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 default. In this sense member countries of a monetary union are downgraded to the status of emerging economies. This makes the monetary union fragile and vulnerable to changing market sentiments. It also makes it possible that self-fulfilling multiple equilibria arise. I analyse the implications of this fragility for the governance of the Eurozone. I conclude that the new governance structure (ESM) does not sufficiently recognise this fragility. Some of the features of the new financial assistance are likely to increase this fragility. In addition, it is also likely to rip member-countries of their ability to use the automatic stabilisers during a recession. This is surely a step backward in the long history of social progress in Europe. I suggest a different approach to deal with these problems.

Suggested Citation

  • Paul De Grauwe, 2012. "A Fragile Eurozone in Search of a Better Governance," The Economic and Social Review, Economic and Social Studies, vol. 43(1), pages 1-30.
  • Handle: RePEc:eso:journl:v:43:y:2012:i:1:p:1-30

    Download full text from publisher

    File URL:
    File Function: First version,2012
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    1. Bertrand Candelon & Amadou N Sy & Rabah Arezki, 2011. "Sovereign Rating News and Financial Markets Spillovers; Evidence from the European Debt Crisis," IMF Working Papers 11/68, International Monetary Fund.
    2. Calvo, Guillermo A, 1988. "Servicing the Public Debt: The Role of Expectations," American Economic Review, American Economic Association, vol. 78(4), pages 647-661, September.
    3. Alasdair Scott & Pau Rabanal & Prakash Kannan, 2009. "Macroeconomic Patterns and Monetary Policy in the Run-up to Asset Price Busts," IMF Working Papers 09/252, International Monetary Fund.
    4. Peirce, Fabrizia & Micossi, Stefano & Carmassi, Jacopo, 2011. "On the Tasks of the European Stability Mechanism," CEPS Papers 4262, Centre for European Policy Studies.
    5. Winkler, Adalbert, 2011. "The joint production of confidence: lessons from nineteenth-century US commercial banks for twenty-first-century Euro area governments," Financial History Review, Cambridge University Press, vol. 18(03), pages 249-276, December.
    6. Kopf, Christian, 2011. "Restoring financial stability in the euro area," CEPS Papers 4292, Centre for European Policy Studies.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. repec:spo:wpecon:info:hdl:2441/eo6779thqgm5r489m6u1i2a0o is not listed on IDEAS
    2. Catherine Mathieu & Henri Sterdyniak, 2012. "Faut-il des règles de politique budgétaire ?," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(7), pages 299-346.
    3. Catherine Mathieu & Henri Sterdyniak, 2014. "In search of a better governance in the euro area," Sciences Po publications info:hdl:2441/63g6fe7kgp8, Sciences Po.
    4. Bruneau, Catherine & Delatte, Anne-Laure & Fouquau, Julien, 2014. "Was the European sovereign crisis self-fulfilling? Empirical evidence about the drivers of market sentiments," Journal of Macroeconomics, Elsevier, vol. 42(C), pages 38-51.
    5. Catherine Mathieu & Henri Sterdyniak, 2014. "Redemption?," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(1), pages 51-91.
    6. Catherine Mathieu & Henri Sterdyniak, 2014. "Peut-on gérer la zone euro ?," Bulletin de l'Observatoire des politiques économiques en Europe, Observatoire des Politiques Économiques en Europe (OPEE), vol. 30(1), pages 3-9, June.
    7. repec:mth:ber888:v:7:y:2017:i:1:p:199-226 is not listed on IDEAS
    8. Mirdala, Rajmund & Ruščáková, Anna, 2015. "On Origins and Implications of the Sovereign Debt Crisis in the Euro Area," MPRA Paper 68859, University Library of Munich, Germany.
    9. Alexandra Ferreira-Lopes & Tiago Neves Sequeira, 2012. "Business Cycles Association in a Small Monetary Union: The Case of Switzerland," Spatial Economic Analysis, Taylor & Francis Journals, vol. 7(1), pages 9-30, March.
    10. Goulas, Eleftherios & Zervoyianni, Athina, 2013. "Growth, deficits and uncertainty: Theoretical aspects and empirical evidence from a panel of 27 countries," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(4), pages 380-392.
    11. repec:spo:wpecon:info:hdl:2441/eo6779thqgm5r489maqa474kg is not listed on IDEAS
    12. Philip R. Lane, 2012. "The European Sovereign Debt Crisis," Journal of Economic Perspectives, American Economic Association, vol. 26(3), pages 49-68, Summer.
    13. Spahn, Peter, 2012. "Integration durch Währungsunion? Der Fall der Euro-Zone," FZID Discussion Papers 57-2012, University of Hohenheim, Center for Research on Innovation and Services (FZID).
    14. Peter Spahn, 2016. "Central Bank Design in a Non-optimal Currency Union A Lender of Last Resort for Government Debt?," ROME Working Papers 201610, ROME Network.
    15. repec:eee:eecrev:v:100:y:2017:i:c:p:337-363 is not listed on IDEAS
    16. Matthias Bank & Alexander Kupfer & Rupert Sendlhofer, 2011. "Performance-sensitive government bonds - A new proposal for sustainable sovereign debt management," Working Papers 2011-24, Faculty of Economics and Statistics, University of Innsbruck.
    17. André Grjebine, 2013. "L’Eurosystème: un mécanisme de transferts en faveur des pays déficitaires ? Le débat," Sciences Po publications info:hdl:2441/eo6779thqgm, Sciences Po.
    18. repec:spo:wpecon:info:hdl:2441/7gjmt2p0l896bo3oar8rqd4vvr is not listed on IDEAS
    19. Alfredo Bardozzetti & Davide Dottori, 2013. "Collective action clauses: how do they weigh on sovereigns?," Temi di discussione (Economic working papers) 897, Bank of Italy, Economic Research and International Relations Area.
    20. Manfred G?rtner & Bj?rn Griesbach, 2017. "Rating Agencies, Self-Fulfilling Prophecy and Multiple Equilibria? An Empirical Model of the European Sovereign Debt Crisis 2009-2011," Business and Economic Research, Macrothink Institute, vol. 7(1), pages 199-226, June.

    More about this item

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eso:journl:v:43:y:2012:i:1:p:1-30. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Martina Lawless). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.