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Fiscal and Monetary Policy Determinants of the Eurozone Crisis and its Resolution

  • Marek Dabrowski

Unlike the crisis years of 2007-2009 (when the insolvency of large banks was a major problem), the current round of the global financial crisis has fiscal origins. Almost all developed countries suffer from an excessive public debt burden that has been built up over the last two decades or more. The financial crisis caused a further deterioration of government accounts as a result of ill-tailored countercyclical fiscal response and, in some cases, a costly financial sector rescue. All excessively indebted countries must conduct fiscal adjustment, even if this involves economic and political costs in terms of lower output and higher unemployment. Central banks can reduce these costs through accommodative monetary policies but without compromising their anti-inflationary missions and institutional independence. The ECB is additionally constrained by its institutional status which is based on a delicate cross-country political consensus. Excessive ECB involvement in quasi-fiscal rescue operations can undermine this consensus and lead to a disintegration of the Eurozone. There are also strong arguments in favor of strengthening fiscal and banking integration within the EU, especially the fiscal discipline mechanism at national levels, and building the EU rescue capacity in respect to sovereigns and banks based on strong policy conditionality.

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Paper provided by CASE-Center for Social and Economic Research in its series CASE Network Studies and Analyses with number 443.

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Length: 39 pages
Date of creation: Aug 2012
Date of revision:
Handle: RePEc:sec:cnstan:0443
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  1. György Surányi, 2012. "The global crisis: Have we learned the right lessons?," CASE Network E-briefs 07, CASE-Center for Social and Economic Research.
  2. Hans-Werner Sinn & Timo Wollmershäuser, 2011. "Target Loans, Current Account Balances and Capital Flows: The ECB’s Rescue Facility," CESifo Working Paper Series 3500, CESifo Group Munich.
  3. Marek Dabrowski, 2009. "The Global Financial Crisis: Lessons for European Integration," CASE Network Studies and Analyses 0384, CASE-Center for Social and Economic Research.
  4. Sinn, Hans-Werner & Wollmershäuser, Timo, 2012. "Target loans, current account balances and capital flows: The ECB’s rescue facility," Munich Reprints in Economics 19556, University of Munich, Department of Economics.
  5. Schoenmaker, Dirk & Gros, Daniel, 2012. "A European Deposit Insurance and Resolution Fund - An Update," CEPS Papers 7276, Centre for European Policy Studies.
  6. Schoenmaker, Dirk & Gros, Daniel, 2012. "A European Deposit Insurance and Resolution Fund," CEPS Papers 6918, Centre for European Policy Studies.
  7. Piotr Bujak & Joanna Siwinska-Gorzelak, 2003. "Short-run Macroeconomic Effects of Discretionary Fiscal Policy Changes," CASE Network Studies and Analyses 0261, CASE-Center for Social and Economic Research.
  8. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973, April.
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