Abstract

DE GRAUWE, Paul. THE GOVERNANCE OF A FRAGILE EUROZONE. Rev.econ.inst. [online]. 2011, vol.13, n.25, pp.33-41. ISSN 0124-5996.

When entering a monetary union, member-countries change the nature of their sovereign debt in a fundamental way, i.e. they cease to have control over the currency in which their debt is issued. As a result, financial markets can force these countries' sovereigns into default. In this sense, member countries of a monetary union are downgraded to the status of emerging economies. This makes the monetary union fragile and vulnerable to changing market sentiments. It also makes it possible that self-fulfilling multiple balances arise. This text analyzes the implications of this fragility for the governance of the Eurozone, and concludes that the new governance structure (ESM) does not sufficiently recognize this fragility. Some of the features of the new financial assistance are likely to increase this fragility. In addition, member-countries may lose the capacity to use automatic stabilizers during a recession. This is surely a step backward. The text suggests a different approach to manage these problems.

Keywords : Eurozone; European central bank; monetary union; multiple equilibria; government debt crisis; lender of last resort.

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