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Design Failures in the Eurozone: Can they be fixed?

Paul De Grauwe

No 7, Europe in Question Discussion Paper Series of the London School of Economics (LEQs) from London School of Economics / European Institute

Abstract: I analyse the nature of the design failures of the Eurozone. I argue first that the endogenous dynamics of booms and busts that are endemic in capitalism continued to work at the national level in the Eurozone and that the monetary union in no way disciplined these into a union-wide dynamics. On the contrary the monetary union probably exacerbated these national booms and busts. Second, the existing stabilizers that existed at the national level prior to the start of the union were stripped away from the member-states without being transposed at the monetary union level. This left the member states naked and fragile, unable to deal with the coming national disturbances. I study the way these failures can be overcome. This leads me to stress the role of the ECB as a lender of last resort and the need to make macroeconomic policies more symmetric so as to avoid a deflationary bias in the Eurozone. I conclude with some thoughts on political unification.

Date: 2013-02-12
New Economics Papers: this item is included in nep-eec, nep-mon and nep-pke
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Working Paper: Design Failures in the Eurozone: Can they be fixed? (2013) Downloads
Working Paper: Design Failures in the Eurozone - can they be fixed? (2013) Downloads
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