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A Fragile Eurozone in Search of a Better Governance

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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, 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 analyze the implications of this fragility for the governance of the Eurozone. I conclude that the new governance structure (ESM) does not sufficiently recognize 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 stabilizers 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, 2011. "A Fragile Eurozone in Search of a Better Governance," CESifo Working Paper Series 3456, CESifo Group Munich.
    • Handle: RePEc:ces:ceswps:_3456
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    References listed on IDEAS

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    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.
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    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. Catherine Mathieu & Henri Sterdyniak, 2019. "Euro area Macroeconomics - Where do we stand 20 years later ?," Sciences Po publications info:hdl:2441/299ncu2o1b9, Sciences Po.
    12. repec:spo:wpecon:info:hdl:2441/eo6779thqgm5r489maqa474kg is not listed on IDEAS
    13. Philip R. Lane, 2012. "The European Sovereign Debt Crisis," Journal of Economic Perspectives, American Economic Association, vol. 26(3), pages 49-68, Summer.
    14. 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).
    15. 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.
    16. repec:eee:eecrev:v:100:y:2017:i:c:p:337-363 is not listed on IDEAS
    17. 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.
    18. 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.
    19. repec:spo:wpecon:info:hdl:2441/7gjmt2p0l896bo3oar8rqd4vvr is not listed on IDEAS
    20. 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.
    21. 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

    Keywords

    Eurozone; multiple equilibria; governance;

    JEL classification:

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

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