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Flexibility versus Stability: A difficult trade-off in the eurozone

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  • De Grauwe, Paul
  • Ji, Yuemei

Abstract

Optimal currency area (OCA) theory has been influential in pushing eurozone countries towards structural reforms to make product and labour markets more flexible. The underlying assumption of the OCA prescription for structural reform is that asymmetric shocks are permanent. However, when shocks are temporary it does not follow that more flexibility is the answer. When shocks are the result of business-cycle movements, the way to deal with them is by stabilisation efforts. This paper provides empirical evidence that suggests that the biggest shocks in the eurozone were the result of business-cycle movements. These were relatively well synchronised, except for their amplitude. We argue that efforts to stabilise business cycles should be strengthened relative to the efforts that have been made to impose structural reforms, with consideration given to the implications for the governance of the eurozone.

Suggested Citation

  • De Grauwe, Paul & Ji, Yuemei, 2016. "Flexibility versus Stability: A difficult trade-off in the eurozone," CEPS Papers 11530, Centre for European Policy Studies.
  • Handle: RePEc:eps:cepswp:11530
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    Cited by:

    1. Nicolas Carnot & Magdalena Kizior & Gilles Mourre, 2017. "Fiscal stabilisation in the Euro-Area: A simulation exercise," Working Papers CEB 17-025, ULB -- Universite Libre de Bruxelles.
    2. Alcidi, Cinzia & D’Imperio, Paolo & Thirion, Gilles, 2017. "Risk-sharing and Consumption-smoothing Patterns in the US and the Euro Area: A comprehensive comparison," CEPS Papers 12514, Centre for European Policy Studies.
    3. De Grauwe, Paul & Ji, Yuemei, 2017. "Endogenous Asymmetric Shocks in the Eurozone. The Role of Animal Spirits," CEPR Discussion Papers 11887, C.E.P.R. Discussion Papers.

    More about this item

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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