Shocking aspects of monetary union: the vulnerability of regions in Euroland

The economic recession in Europe, triggered by the financial crisis of 2008–2009, has rekindled the debate over whether Europe constitutes a viable single currency area. A key issue concerns the relationship between regional economic cyclicity and monetary union: in the absence of a common automatic fiscal stabilization mechanism and with limited geographical mobility of factors, the greater the asymmetry of shocks across the regions making up a currency area, the more that area departs from an optimal single currency space as far as monetary policy is concerned. Our aim in this article is to investigate whether the regions in the Eurozone have become more or less similar in their vulnerability and resilience to economic shocks since the monetary union. Using predictions based on a spatial panel model with random effects, an endogenous spatial lag and spatially autoregressive errors, we find that a common contractionary shock across the Eurozone has its biggest impact on the most geographically isolated regions, which are precisely those peripheral regions in Euroland that are suffering the most acute sovereign debt crisis, and which are among the lowest productivity regions of the European Union. The implications of these results for the debate over European monetary and fiscal integration are discussed.