The euro at twenty: Follies of youth?

Ricardo Cabral and Francisco Louçã

No 2019/02, Working Papers Department of Economics from ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa

Abstract: This paper overviews the early history of the euro and argues that the euro was suboptimally designed, without monetary sovereignty of Eurozone (EZ) Member States, in order to comply with political goals set by wealthier Member States. Given this constraint, the euro architects designed a single currency in which its irreversibility is achieved through the EZ banking system, with recourse to the TARGET2 payment system. This allowed the banking systems of deficit Member States to fund large cumulative current account deficits in the first decade of the euro. The euro crisis led EZ policy makers to define new far more demanding fiscal rules and a new Banking Union to constrain the ability of EZ banking systems to fund sovereigns and current account deficits. Thus, the euro at twenty has become more fragile.

Keywords: Euro crisis; fiscal rules; banking union; Eurozone; austerity strategy (search for similar items in EconPapers)
JEL-codes: E52 E62 F32 F34 F36 F42 F45 (search for similar items in EconPapers)
Date: 2019-01
New Economics Papers: this item is included in nep-eec, nep-mac and nep-mon
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Journal Article: The euro at twenty: Follies of youth? (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:ise:isegwp:wp022019

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More papers in Working Papers Department of Economics from ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa Department of Economics, ISEG - Lisbon School of Economics and Management, Universidade de Lisboa, Rua do Quelhas 6, 1200-781 LISBON, PORTUGAL.
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