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Instability of the Eurozone? On Monetary Policy, House Prices and Labor Market Reforms

  • Belke, Ansgar

    ()

    (University of Duisburg-Essen)

  • Gros, Daniel

    ()

    (LISER (CEPS/INSTEAD))

This paper deals with potential instabilities in the Eurozone stemming from an insufficient interplay between monetary policy and reform effort on the one hand and the emergence of intra-Euro area divergences on the other. As a first step, we assess the effect of EMU on structural reform and investigate this question by an examination of the relationship between fixed exchange rates and reform in two wider samples of countries. We also stress that loose monetary conditions, which prevailed until some months ago, can also manifest themselves in asset price inflation, notably in the housing market. When these bubbles burst (e.g., when housing prices stop rising) this often leads to a prolonged period of economic instability and weakness rather than consumer price inflation. As a second step, we point out that risks for EMU are not only increasing because longer-term disequilibria become evident in fiscal and monetary policy, but also because serious divergences are now appearing within the Euro area which threaten its long-term cohesiveness. The most manifest example of this threat comes from what promises to be a long-term divergence between Germany and Italy, which for the time being was offset by asynchronous developments of house prices in both countries. There are still large differences within the Euro area, with the small countries performing much better than the large ones on almost every indicator. This suggests that better policies can make a large difference even if monetary policy is the same for everybody.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2547.

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Length: 37 pages
Date of creation: Jan 2007
Date of revision:
Publication status: published in: in: Heise, Michael, Tilly, Richard, Welfens, Paul J.J. (eds.), Integration, Financial Markets and Innovations – 50 Years of EU Dynamics, 2007, 75-108.
Handle: RePEc:iza:izadps:dp2547
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  1. Sibert, Anne & Sutherland, Alan, 1997. "Monetary Regimes and Labour Market Reform," CEPR Discussion Papers 1731, C.E.P.R. Discussion Papers.
  2. Daniel Fernández-Kranz & Mark Hon, 2006. "A Cross-Section Analysis of the Income Elasticity of Housing Demand in Spain: Is There a Real Estate Bubble?," The Journal of Real Estate Finance and Economics, Springer, vol. 32(4), pages 449-470, June.
  3. Ansgar Belke, 2002. "Does the ECB Follow the FED?," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 211/2002, Department of Economics, University of Hohenheim, Germany.
  4. Saint-Paul, G. & Bentolila, S., 2000. "Will EMU Increase Eurosclerosis?," Papers 0004, Centro de Estudios Monetarios Y Financieros-.
  5. Massimo Giuliodori, 2005. "The Role Of House Prices In The Monetary Transmission Mechanism Across European Countries," Scottish Journal of Political Economy, Scottish Economic Society, vol. 52(4), pages 519-543, 09.
  6. VAN POECK, André & BORGHIJS, Alain, 2001. "EMU and labour market reform: Needs, incentives and realisations," Working Papers 2001022, University of Antwerp, Faculty of Applied Economics.
  7. Charles Wyplosz, 2006. "European Monetary Union: the dark sides of a major success," Economic Policy, CEPR;CES;MSH, vol. 21(46), pages 207-261, 04.
  8. repec:dgr:kubcen:199795 is not listed on IDEAS
  9. Duval, Romain & Elmeskov, Jørgen, 2006. "The effects of EMU on structural reforms in labour and product markets," Working Paper Series 0596, European Central Bank.
  10. Abdul Abiad & Ashoka Mody, 2005. "Financial Reform: What Shakes It? What Shapes It?," American Economic Review, American Economic Association, vol. 95(1), pages 66-88, March.
  11. Nathalie Girouard & Mike Kennedy & Paul van den Noord & Christophe André, 2006. "Recent House Price Developments: The Role of Fundamentals," OECD Economics Department Working Papers 475, OECD Publishing.
  12. Ansgar Belke & Daniel Gros, 1999. "Estimating the costs and benefits of EMU: The impact of external shocks on labour markets," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 135(1), pages 1-47, March.
  13. Adam Posen, 2003. "It Takes More Than a Bubble to Become Japan," RBA Annual Conference Volume, in: Anthony Richards & Tim Robinson (ed.), Asset Prices and Monetary Policy Reserve Bank of Australia.
  14. Heinemann, Friedrich, 2004. "Explaining Reform Deadlocks," ZEW Discussion Papers 04-39, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  15. Ansgar Belke & Marcel Wiedmann, 2005. "Boom or Bubble in the US Real Estate Market?," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 260/2005, Department of Economics, University of Hohenheim, Germany.
  16. Pietro Catte & Nathalie Girouard & Robert W.R. Price & Christophe André, 2004. "Housing Markets, Wealth and the Business Cycle," OECD Economics Department Working Papers 394, OECD Publishing.
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