The Governance of a Fragile Eurozone

Paul De Grauwe

Chapter 12 in Exchange Rates and Global Financial Policies, 2014, pp 297-320 from World Scientific Publishing Co. Pte. Ltd.

Abstract: When entering a monetary union, member countries change the nature of their sovereign debt in a fundamental way; that is, 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 defaulting. This makes the monetary union fragile and vulnerable to changing market sentiments. It also makes it possible that self-fulfilling multiple equilibria arise. I analyze the implications of this fragility for the governance of the Eurozone. I argue that the role of the European Central Bank as a lender of last resort is crucial in reducing the fragility of the Eurozone. In addition, steps toward a budgetary union are key in structurally strengthening the union.

Keywords: Exchange Rate; Financial Policies; Turbulence; Exchange Market; Motenary Union; Macroeconomics; Economic Models; Behaviorial Economics; Monetary Integration; Euro; Financial Crisis; European Monetary Policy; Dynamic Stochastic General Equilibriumauthor (search for similar items in EconPapers)
Date: 2014
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Related works:
Journal Article: The Governance of a Fragile Eurozone (2012)
Working Paper: The Governance of a Fragile Eurozone (2012)
Working Paper: Governance of a Fragile Eurozone (2011)
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