EMU and the New "Stabilization State": Demand Disturbances and Asymmetric Responses

George Pagoulatos and Theodore Pelagidis

MPRA Paper from University Library of Munich, Germany

Abstract: Despite its important advantages of efficiency gains, price transparency, monetary stability, easing currency markets pressure on the payments balance, and so on, EMU is anything but a risk-free enterprise. Economic conflict may arise from unfortunate developments regarding the Euro, which may provoke political disharmony, disputes between member-states, and destabilization. The deteriorating trade performance of the European periphery is one issue. Asymmetrical demand disturbances is another, especially as labor markets remain largely rigid. Eurozone mechanisms may be unable to face demand disturbances under a single currency regime, which could also debilitate production systems and so diminish trade in lagging regions. Under the Eurozone institutional architecture, the erosion of fiscal policy and inability to successfully handle asymmetric shocks will reflect negatively on the sociopolitical stability and legitimacy of EMU. The inherent asymmetry of potential economic disturbances in the Eurozone can only be countered by asymmetric policy responses, corresponding to different socioeconomic and structural endowments of member states. The Eurozone configuration favors if not necessitates a state committed to stabilization, but this new stabilization state’s foremost feature is flexibility, at micro- and macroeconomic level, including the role of a partner and catalyst of developmental policies, and facilitator of social pacts.

Keywords: Labor market; Trade; Fiscal policies (search for similar items in EconPapers)
JEL-codes: F1 H3 J2 J4 J5 (search for similar items in EconPapers)
Date: 2004
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Published in Current Politics and Economics of Europe 1.13(2004): pp. 1-16

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