How the euro crisis evolved and how to avoid another: EMU, fiscal policy and credit ratings

Vito Polito and Michael Wickens
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Michael Wickens: Cardiff University and University of York

No 22, Special Conference Papers from Bank of Greece

Abstract: This paper argues that the crisis was an outcome of EMU: setting a common monetary policy for countries with different initial inflation rates. The crisis countries were those with high inflation rates which then had negative real interest rates and consequently over-borrowed. Current policy discussions focus on crisis measures: fiscal, banking and political union, not avoiding another crisis. This paper suggests two ways to avoid a future crisis: offset an inappropriate monetary policy using fiscal policy; markets could better price loan rates by taking into account default risk. The paper shows that neither was done prior to the crisis.

Keywords: fiscal union; monetary and fiscal policy; credit ratings; default risk (search for similar items in EconPapers)
JEL-codes: E52 E62 H63 H68 (search for similar items in EconPapers)
Pages: 28
Date: 2013-07
New Economics Papers: this item is included in nep-cba and nep-mac
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Citations: View citations in EconPapers (7)

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Related works:
Journal Article: How the Euro Crisis Evolved and how to Avoid Another: EMU, Fiscal Policy and Credit Ratings (2014)
Working Paper: How the Euro Crisis Evolved and How to Avoid Another: EMU, Fiscal Policy and Credit Ratings (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:bog:spaper:22

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