How the Euro Crisis Evolved and How to Avoid Another: EMU, Fiscal Policy and Credit Ratings

Michael Wickens and Vito Polito

No 9521, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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: Credit ratings; Emu; Euro crisis; Fiscal policy (search for similar items in EconPapers)
JEL-codes: E52 E62 H63 H68 (search for similar items in EconPapers)
Date: 2013-06
New Economics Papers: this item is included in nep-eec, nep-mac, nep-mon and nep-opm
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Citations: View citations in EconPapers (8)

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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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