The Future of the Currency Union
This note attempts a concise yet comprehensive overview of the crisis still facing the eurozone, in the areas of competitiveness, fiscal policy, and banking. The euro's founding documents enshrined such principles as fiscal constraints, the "no bailout clause," and assignment to the ECB of the goal of low inflation to the exclusion of monetizing national debts. Those principles have been permanently compromised. On the one hand, German taxpayers cannot be expected to agree to bailouts of profligate euro members without end. On the other hand, if they were to insist on those founding principles, the euro would not survive. It is especially important to recognize that the (predictable) impact of fiscal austerity has been to reduce output in the periphery countries, not raise it, and thereby to raise debt/GDP ratios, not lower them. The leaders have finally taken some steps in the right direction over the last year: movement toward a banking union; more adjustment time for Greece, Portugal and Spain; and ECB bond purchases. But for the countries that are to remain in the euro, much adjustment still lies ahead: more debt-reduction (painful for the creditor North) and more internal devaluation (even more painful for the uncompetitive South). As to a long-run fiscal regime that addresses the now-exacerbated problem of moral hazard, the Fiscal Compact is not enough in itself. Two innovations favored by the author are the red-bonds/blue-bonds proposal and the delegation of forecasting to independent fiscal agencies.
|Date of creation:||May 2013|
|Date of revision:|
|Contact details of provider:|| Postal: 79 JFK Street, Cambridge, MA 02138|
Web page: http://www.ksg.harvard.edu/research/working_papers/index.htm
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Carmen M. Reinhart & Kenneth S. Rogoff, 2009.
"This Time Is Different: Eight Centuries of Financial Folly,"
Princeton University Press,
edition 1, number 8973.
- Michael Woodford, 2011.
"Simple Analytics of the Government Expenditure Multiplier,"
American Economic Journal: Macroeconomics,
American Economic Association, vol. 3(1), pages 1-35, January.
- Michael Woodford, 2010. "Simple Analytics of the Government Expenditure Multiplier," NBER Working Papers 15714, National Bureau of Economic Research, Inc.
- Woodford, Michael, 2010. "Simple Analytics of the Government Expenditure Multiplier," CEPR Discussion Papers 7704, C.E.P.R. Discussion Papers.
- Alan J. Auerbach & Yuriy Gorodnichenko, 2012.
"Fiscal Multipliers in Recession and Expansion,"
in: Fiscal Policy after the Financial Crisis, pages 63-98
National Bureau of Economic Research, Inc.
- Reinhart, Karmen & Rogoff, Kenneth, 2009. ""This time is different": panorama of eight centuries of financial crises," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 77-114, March.
- Beetsma, Roel & Uhlig, Harald, 1999. "An Analysis of the Stability and Growth Pact," Economic Journal, Royal Economic Society, vol. 109(458), pages 546-71, October.
- Olivier Blanchard & Francesco Giavazzi, 2002. "Current Account Deficits in the Euro Area: The End of the Feldstein Horioka Puzzle?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2), pages 147-210.
- Frankel, Jeffrey A. & Schreger, Jesse, 2012.
"Over-Optimistic Official Forecasts in the Eurozone and Fiscal Rules,"
Working Paper Series
rwp12-041, Harvard University, John F. Kennedy School of Government.
- Jeffrey A. Frankel & Jesse Schreger, 2012. "Over-optimistic Official Forecasts in the Eurozone and Fiscal Rules," NBER Working Papers 18283, National Bureau of Economic Research, Inc.
- Eichengreen, Barry, 1993. "European Monetary Unification," Journal of Economic Literature, American Economic Association, vol. 31(3), pages 1321-57, September.
- Lars Jonung & Eoin Drea, 2009. "The euro: It can't happen, It's a bad idea, It won't last. US economists on the EMU, 1989-2002," European Economy - Economic Papers 2008 - 2015 395, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
- Giovanni Callegari & Giovanni Melina & Nicoletta Batini, 2012. "Successful Austerity in the United States, Europe and Japan," IMF Working Papers 12/190, International Monetary Fund.
- Philip R. Lane, 2012. "The European Sovereign Debt Crisis," Journal of Economic Perspectives, American Economic Association, vol. 26(3), pages 49-68, Summer.
- Fatás, Antonio & Mihov, Ilian, 2001. "The Effects of Fiscal Policy on Consumption and Employment: Theory and Evidence," CEPR Discussion Papers 2760, C.E.P.R. Discussion Papers.
When requesting a correction, please mention this item's handle: RePEc:ecl:harjfk:rwp13-015. 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: ()
If references are entirely missing, you can add them using this form.