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The governance of a fragile Eurozone

de Grauwe, Paul (2011) The governance of a fragile Eurozone. CEPS working documents, No. 346. Centre for European Policy Studies, Brussels, Belgium. ISBN 9789461380968

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Abstract

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 equilibria arise. This paper analyzes the implications of this fragility for the governance of the eurozone. It concludes that the new governance structure – the European Stability Mechanism (ESM), which is intended to be successor starting in 2013 of the European Financial Stability Mechanism (EFSF), created in May 2010 – does not sufficiently recognize this fragility. Some of the features of the new financial assistance are likely to increase this fragility. In addition, it is also likely to present member countries from using the automatic stabilizers during a recession. This is surely a step backward in the long history of social progress in Europe. The author concludes by suggesting a different approach for dealing with these problems.

Item Type: Monograph (Working Paper)
Official URL: http://www.ceps.eu/
Additional Information: © 2011 Centre for European Policy Studies
Library of Congress subject classification: H Social Sciences > HG Finance
J Political Science > JZ International relations
Journal of Economic Literature Classification System: F - International Economics > F5 - International Relations and International Political Economy > F59 - International Relations and International Political Economy: Other
G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation
Sets: Departments > European Institute
Collections > Economists Online
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: No. 346
Date Deposited: 08 Oct 2012 09:18
URL: http://eprints.lse.ac.uk/46640/

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