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Finance at Center Stage: Some Lessons of the Euro Crisis

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  • Maurice Obstfeld

Abstract

Because of recent economic crises, financial fragility has regained prominence in both the theory and practice of macroeconomic policy. Consistent with macroeconomic paradigms prevalent at the time, the original architecture of the euro zone assumed that safeguards against inflation and excessive government deficits would suffice to guarantee macroeconomic stability. Recent events, in both Europe and the industrial world at large, challenge this assumption. After reviewing the roots of the euro crisis in financial-market developments, this essay draws some conclusions for the reform of euro area institutions. The euro area is moving quickly to correct one flaw in the Maastricht treaty, the vesting of all financial supervisory functions with national authorities. However, the sheer size of bank balance sheets suggest that the euro area must also confront a financial/fiscal trilemma: countries in the euro zone can no longer enjoy all three of financial integration with other member states, financial stability, and fiscal independence, because the costs of banking rescues may now go beyond national fiscal capacities. Thus, plans to reform the euro zone architecture must combine centralized supervision with some centralized fiscal backstop to finance bank resolution in situations of insolvency.

Suggested Citation

  • Maurice Obstfeld, 2013. "Finance at Center Stage: Some Lessons of the Euro Crisis," European Economy - Economic Papers 2008 - 2015 493, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  • Handle: RePEc:euf:ecopap:0493
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The Importance of Being Europe
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2014-10-27 17:28:33

    Citations

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    Cited by:

    1. Ricardo Reis, 2015. "Looking for a Success in the Euro Crisis Adjustment Programs: The Case of Portugal," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 46(2 (Fall)), pages 433-458.
    2. repec:pal:imfecr:v:66:y:2018:i:1:d:10.1057_s41308-017-0048-y is not listed on IDEAS
    3. Dermot Hodson, 2016. "Eurozone Governance: From the Greek Drama of 2015 to the Five Presidents’ Report," Journal of Common Market Studies, Wiley Blackwell, vol. 54, pages 150-166, September.
    4. Leila E. Davis & Charalampos Konstantinidis & Yorghos Tripodis, 2017. "A proposal for a federalized unemployment insurance mechanism for Europe," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 14(1), pages 92-116, April.
    5. Lane, Philip R., 2013. "Capital Flows in the Euro Area," CEPR Discussion Papers 9493, C.E.P.R. Discussion Papers.
    6. van Riet, Ad, 2015. "Market-preserving fiscal federalism in the European Monetary Union," MPRA Paper 77772, University Library of Munich, Germany.
    7. Honkapohja, Seppo, 2013. "The euro crisis : a view from the North," Research Discussion Papers 12/2013, Bank of Finland.
    8. Jörg Bibow, 2015. "The euro's savior? Assessing the ECB's crisis management performance and potential for crisis resolution," IMK Studies 42-2015, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    9. Pasimeni, Paolo, 2013. "An Optimum Currency Crisis," MPRA Paper 53506, University Library of Munich, Germany.
    10. Beblavý, Miroslav & Lenaerts, Karolien, 2017. "Feasibility and Added Value of a European Unemployment Benefits Scheme," CEPS Papers 12230, Centre for European Policy Studies.
    11. Honkapohja, Seppo, 2014. "The Euro Area Crisis: A View from the North," Journal of Macroeconomics, Elsevier, vol. 39(PB), pages 260-271.
    12. Ricardo Reis, 2013. "The Portugese Slump and Crash and the Euro Crisis," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 44(1 (Spring), pages 143-210.
    13. Galina Hale & Maurice Obstfeld, 2016. "The Euro And The Geography Of International Debt Flows," Journal of the European Economic Association, European Economic Association, vol. 14(1), pages 115-144, February.
    14. Maurice Obstfeld, 2013. "Crises and the International System," International Economic Journal, Taylor & Francis Journals, vol. 27(2), pages 143-155, June.
    15. Rosaria Rita Canale & Paul Grauwe & Pasquale Foresti & Oreste Napolitano, 2018. "Is there a trade-off between free capital mobility, financial stability and fiscal policy flexibility in the EMU?," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 154(1), pages 177-201, February.
    16. Markus K. Brunnermeier & Luis Garicano & Philip R. Lane & Marco Pagano & Ricardo Reis & Tano Santos & David Thesmar & Stijn Van Nieuwerburgh & Dimitri Vayanos, 2016. "The Sovereign-Bank Diabolic Loop and ESBies," American Economic Review, American Economic Association, vol. 106(5), pages 508-512, May.
    17. Nicholas Crafts, 2014. "What Does the 1930s' Experience Tell Us about the Future of the Eurozone?," Journal of Common Market Studies, Wiley Blackwell, vol. 52(4), pages 713-727, July.
    18. Jakob de Haan & Jeroen Hessel & Niels Gilbert, 2014. "Reforming the architecture of EMU: Ensuring stability in Europe," DNB Working Papers 446, Netherlands Central Bank, Research Department.
    19. Léo Aparisi de Lannoy & Xavier Ragot, 2017. "Une (ré) assurance chômage européenne," Sciences Po publications info:hdl:2441/5i0jcpu6sk9, Sciences Po.
    20. repec:rss:jnljfm:v1i1p2 is not listed on IDEAS
    21. László Andor, 2016. "Towards shared unemployment insurance in the euro area," IZA Journal of European Labor Studies, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 5(1), pages 1-15, December.
    22. Antonin Rusek, 2014. "Eurozone’s Future: Convergence, Restructuring or “Muddling Through”?," Eurasian Journal of Economics and Finance, Eurasian Publications, vol. 2(3), pages 45-56.
    23. repec:eee:mateco:v:74:y:2018:i:c:p:1-20 is not listed on IDEAS
    24. Theodoros S. Papaspyrou, 2015. "EMU 2.0 Drawing Lessons From the Crisis - a New Framework For Stability and Growth," Working Papers 192, Bank of Greece.

    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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