MANAGING THE FRAGILITY OF THE EUROZONE BY PAUL De GRAUWE

Vladimir Borgy, Carine Bouthevillain and Gilles Dufrénot ()

International Journal of Finance & Economics, 2014, vol. 19, issue 1, 3-11

Abstract: ABSTRACT This paper discusses sources of self‐fulfilling equilibria in the Eurozone when some governments are highly susceptible to movements of distrust by investors who fear some payment difficulty. Self‐fulfilling prophecies occur when countries become insolvent only because investors fear insolvency. They induce multiple equilibria, some of which correspond to bad equilibria and others to good equilibria. An important issue then is to solve this problem, notably to eliminate the bad equilibria. In the short‐run, the role of the central bank as a lender of last resort is key. But this raises issues about the risk inherent to its intervention (inflation, solvency). In the medium run, macroeconomic policies in the euro are central (structural reforms and the reduction of external imbalances). In the long run, it may be worth proceeding to the consolidation of national budgets and debts, which would protect the countries of being forced with default by the financial markets. Copyright © 2013 John Wiley & Sons, Ltd.

Date: 2014
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Working Paper: Managing the fragility of the Eurozone by Paul de Grauwe (2014)
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