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The Governance of a Fragile Eurozone

In: Exchange Rates and Global Financial Policies

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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.

Suggested Citation

  • Paul De Grauwe, 2014. "The Governance of a Fragile Eurozone," World Scientific Book Chapters, in: Exchange Rates and Global Financial Policies, chapter 12, pages 297-320, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814513197_0012
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