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Country adjustment to a ‘sudden stop’: does the euro make a difference?

Daniel Gros and Cinzia Alcidi ()

International Economics and Economic Policy, 2015, vol. 12, issue 1, 5-20

Abstract: This paper starts from the observation that two groups of European countries, neither of which could use the exchange rate as an adjustment instrument, experienced a sudden stop after the outbreak of the global financial crisis. The first group comprises Greece, Ireland, Italy, Portugal and Spain, while four newer EU Member States with the exchange rate pegged to the euro, Bulgaria, Estonia, Latvia and Lithuania, belong to the second group. The main finding is that the adjustment was quicker outside EMU than inside. The shock absorber provided by the Eurosystem reduced the pressure for a quick adjustment, while foreign ownership of banks in non-euro area countries favoured quick fiscal and external corrections but also averted the legacy of a banking crisis. A rudimentary welfare comparison of the two patterns over the whole period of adjustment suggests that the ‘short and sharp’ correction approach is preferable in terms of macroeconomic outcome. Copyright Springer-Verlag Berlin Heidelberg 2015

Keywords: Country adjustment; Imbalances; Sudden stop; Monetary union; E20; F32; F36; H60 (search for similar items in EconPapers)
Date: 2015
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Working Paper: Country adjustment to a ‘sudden stop’: Does the euro make a difference? (2013) Downloads
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DOI: 10.1007/s10368-014-0286-7

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