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A Tale of Politically-Failing Single-Currency Area

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  • Assaf Razin
  • Steven Rosefielde

Abstract

The global financial crisis which erupted in the United States instantaneously swept across Europe. Like the United States, the European Monetary Union (EMU) was ripe for a crash. It had its own real estate bubble, specifically in Ireland and Spain, indulged in excessive deficit spending, financially deregulated, and rapidly expanded credit Policy responses and recovery patterns for key EU members like Germany and France, within the Eurozone, were similar. However, after the bubble burst and the crisis began unfolding it became clear that the Eurozone plight differed from America's in one fundamental respect. There was no exact counterpart of Eurozone GIIPS (Greece, Italy, Ireland, Portugal, and Spain) in the United States. Some American states had over-borrowed, but the sovereign debt crisis didn't place individual states at deflationary risk, or threaten the viability of the federal union. Not so for some members within the Eurozone. Politicians on both sides of the Atlantic can be uncooperative, but inter-state disputes are more easily finessed under the American federal system than the Eurozone politically weakly integrated system. The disparity is traced to the EU's and Eurozone's special form of governance called "supra-nationality" (a partially sovereign transnational organization) that has been largely ignored in economic treatises about the costs and benefits of monetary unions. The EZ members have put themselves in a monetary cage, akin to the gold standard, in which member states have surrendered control over their monetary and foreign exchange rate policies to the German dominated European Central Bank (ECB), without supplementary central fiscal, private banking and political union institutions.

Suggested Citation

  • Assaf Razin & Steven Rosefielde, 2012. "A Tale of Politically-Failing Single-Currency Area," NBER Working Papers 18352, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:18352
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    1. Thomas J. Sargent, 2012. "Nobel Lecture: United States Then, Europe Now," Journal of Political Economy, University of Chicago Press, vol. 120(1), pages 1-40.
    2. Goodfriend, Marvin, 2011. "Central banking in the credit turmoil: An assessment of Federal Reserve practice," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 1-12, January.
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    Cited by:

    1. Tomas Adam & Robert Ambrisko & Oxana Babecka Kucharcukova & Jan Babecky & Sona Benecka & Jan Bruha & Vilma Dingova & Dana Hajkova & Tomas Holub & Eva Hromadkova & David Kocourek & Lubos Komarek & Zlat, 2014. "Analyses of the Czech Republic's Current Economic Alignment with the Euro Area 2014," Occasional Publications - Edited Volumes, Czech National Bank, Research Department, number as14 edited by Kamila Kulhava & Jakub Mateju.
    2. Katerina Arnostova & Oxana Babecka Kucharcukova & Jan Babecky & Vojtech Belling & Sona Benecka & Jan Bruha & Martin Gurtler & Tomas Holub & Eva Hromadkova & Lubos Komarek & Zlatuse Komarkova & Petr Kr, 2016. "Analyses of the Czech Republic's Current Economic Alignment with the Euro Area 2016," Occasional Publications - Edited Volumes, Czech National Bank, Research Department, number as16 edited by Katerina Arnostova & Lucie Matejkova.
    3. Tomas Adam & Oxana Babecka Kucharcukova & Jan Babecky & Vojtech Belling & Sona Benecka & Jan Bruha & Kamil Galuscak & Tomas Holub & Eva Hromadkova & Lubos Komarek & Zlatuse Komarkova & Kamila Kulhava , 2015. "Analyses of the Czech Republic's Current Economic Alignment with the Euro Area 2015," Occasional Publications - Edited Volumes, Czech National Bank, Research Department, number as15 edited by Kamila Kulhava & Lucie Matejkova.
    4. repec:cnb:ocpubv:as17 is not listed on IDEAS
    5. Tomas Adam & Oxana Babecka Kucharcukova & Jan Babecky & Jan Bruha & Tomas Holub & Eva Hromadkova & David Kocourek & Lubos Komarek & Zlatuse Komarkova & Kamila Kulhava & Petr Kral & Ivana Kubicova & Ji, 2013. "Analyses of the Czech Republic's Current Economic Alignment with the Euro Area 2013," Occasional Publications - Edited Volumes, Czech National Bank, Research Department, number as13 edited by Jakub Mateju & Kamila Kulhava.

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    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • F10 - International Economics - - Trade - - - General
    • N0 - Economic History - - General

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