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The Governance of a Fragile Eurozone

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  • De Grauwe, Paul
Abstract
When entering a monetary union, member countries change the nature of their sovereign debt in a fundamental way; that is, they cease to have control over the currency in which their debt is issued. As a result, financial markets can force these countries' sovereigns into defaulting. This makes the monetary union fragile and vulnerable to changing market sentiments. It also makes it possible that self-fulfilling multiple equilibria arise. I analyze the implications of this fragility for the governance of the Eurozone. I argue that the role of the European Central Bank as a lender of last resort is crucial in reducing the fragility of the Eurozone. In addition, steps toward a budgetary union are key in structurally strengthening the union.
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Suggested Citation

  • De Grauwe, Paul, 2012. "The Governance of a Fragile Eurozone," Walter Adolf Jöhr Lecture 2012, University of St. Gallen, School of Economics and Political Science, Institute of Economics (FGN-HSG).
    • Handle: RePEc:usg:wajohr:2012
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    1. Bertrand Candelon & Mr. Amadou N Sy & Mr. Rabah Arezki, 2011. "Sovereign Rating News and Financial Markets Spillovers: Evidence from the European Debt Crisis," IMF Working Papers 2011/068, International Monetary Fund.
    2. Claudio Borio, 2003. "Towards a Macroprudential Framework for Financial Supervision and Regulation?," CESifo Economic Studies, CESifo Group, vol. 49(2), pages 181-215.
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    9. Kopf, Christian, 2011. "Restoring financial stability in the euro area," CEPS Papers 4292, Centre for European Policy Studies.
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