Monetary Policy Crisis in the Eurozone

Ioanna Kokores

Chapter Chapter 5 in Monetary Policy in Interdependent Economies, 2023, pp 99-136 from Springer

Abstract: Abstract This chapter provides a critical analysis on the monetary considerations in interdependent economies, with reference to the European sovereign debt crisis. The euro area witnessed a varied economic landscape encompassing two severe financial crises and a severe adverse economic shock due to the COVID-19 pandemic, facing economic stagnation, that rendered obvious the shortcomings of the initial monetary union. Policy responses included a fiscal backstop, an expansion on the ECB balance sheet, an imperfect bank union and a progressing integration of capital markets, and a notable contribution of the government sector to raising uncertainty (regarding the buildup of fiscal imbalances and sovereign risk locally). The complexity of the interactions across sectors and policy agents in the euro area poses many challenges for the economic analysis, particularly in relation to the use of models that exclude distinct feedback channels. The founding treaty of the euro area neglected financial stability concerns; where absent a mechanism to address continuous and large trade surpluses in some countries and concurrent large and continuous deficits in others. The euro area political and monetary authorities should communicate their support over the new roadmap since capital flight out of distressed countries will accelerate, without it destabilizing the related economies.

Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:spr:fimchp:978-3-031-41958-4_5

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DOI: 10.1007/978-3-031-41958-4_5

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