Interest Rates, Eurobonds and Intra-European Exchange Rate Misalignments: the Challenge of Sustainable Adjustments in the Eurozone

Vincent Duwicquet (), Jacques Mazier and Jamel Saadaoui

Working Papers of BETA from Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg

Abstract: The euro zone crisis illustrates the deficiencies of adjustment mechanisms in a monetary union characterized by a large heterogeneity. Exchange rate adjustments being impossible, they are very few alternative mechanisms. At the level of the whole euro zone the euro is close to its equilibrium parity. But the euro is strongly overvalued for Southern European countries, France included, and largely undervalued for Northern European countries, especially Germany. The paper gives a new evaluation of these exchange rate misalignments inside the euro zone, using a FEER approach, and examines the evolution of competitiveness. In a second step, we use a two-country SFC model of a monetary union with endogenous interest rates and eurobonds issuance. Three main results are obtained. Facing a competitiveness loss in southern countries due to exchange rates misalignments, increasing intra-European financing by banks of northern countries or other institutions could contribute to reduce the debt burden and induce a partial recovery but public debt would increase. Implementation of eurobonds as a tool to partly mutualize European sovereign debt would have a rather similar positive impact, but with a public debt limited to 60% of GDP. Furthermore, eurobonds could also be used to finance large European projects which could impulse a stronger recovery in the entire euro zone with stabilized current account imbalances. However, the settlement of a European Debt Agency in charge of the issuance of the eurobonds would face strong political obstacles.

Keywords: Eurozone Crisis; Sustainable Adjustments; Exchange Rate Misalignments; Eurobonds; Interest Rate. (search for similar items in EconPapers)
JEL-codes: C23 E12 F31 F32 F37 F41 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-eec, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Interest rates, Eurobonds and intra-European exchange rate misalignments: The challenge of sustainable adjustments in the Eurozone (2016)
Working Paper: Interest rates, Eurobonds and intra-European exchange rate misalignments: The challenge of sustainable adjustments in the Eurozone (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:ulp:sbbeta:2015-03

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