De grauwe economics of monetary union pdf


 

The seventh edition of 'Economics of Monetary Union' provides a concise analysis of the theories and policies relating to monetary union. De Grauwe analyses. By Paul De Grauwe; Abstract: The ninth edition of Economics of Monetary Union provides a concise analysis of the theories and policies relating to. The twelfth edition of Economics of Monetary Union provides a concise analysis of the theories and policies relating to monetary union. The author addresses.

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De Grauwe Economics Of Monetary Union Pdf

Monetary Union. Paul De Grauwe. John Paulson Chair in European Political Economy. London School of Economics. OXFORD. UNIVERSITY PRESS. Economics of Monetary Integration” first published in , which could . of these different mechanisms see De Grauwe and Mongelli(). The Economic and Monetary Union: Its Past, Present and Future However, while the former (e.g. De Grauwe, ; Wolff, ) believe this.

This preview shows page 1 - 12 out of 12 pages. Subscribe to view the full document. This then forces the government to institute austerity programmes in the midst of a recession. This feature has been shown to produce pronounced booms and busts in emerging economies see Eichengreen et al. In Box 5.

In addition, in order to restore competitiveness, wages Were cut dramatically Fig. No other Eurozone member country faced such intense adjustments.

EconPapers: Economics of Monetary Union

The intensity of the economic and fiscal crisis in Greece that we just described led to the phenomena we discussed in this chapter and in Chapter 1 Sections 1. Holders of Greek government bonds massively sold these bonds, leading to record high interest rates in Greece, pushing the Greek government into illiquidity and forcing it to institute intense austerity.

Put differently, Greece was forced to switch off the automatic budget stabilizers, intensifying the decline in GDP and the increase in unemployment. Greece was pushed into a bad equilibrium. The Greek drama illustrates two points concerning the costs of a monetary union. First the adjustment costs after a large asymmetric shock can be very high in a monetary union. These adjustment costs are made more severe in a monetary union because the country cannot devalue the currency.

When these adjustment costs take the intensity they have had in Greece the temptation to exit becomes strong. Second, the fact that the government cannot issue debt in its own currency makes it prone to being pushed into illiquidity and insolvency. Such a dynamic makes the government help— less and forces it to look for help from creditors.

The latter, however, impose their rule, which leads to a loss of sovereignty of the country.

DE GRAUWE - 11TH EDITION - PP 114-124.pdf - Economics of...

From the previous discussion it appears that there is an important interaction between economics and politics. The adjustment mechanism in a monetary union can be extremely painful, leading millions of people into unemployment and poverty for prolonged periods. Such severe suffering can lead to political upheaval, leading politicians to power who prom— ise a better life outside the monetary union.

This, in a way, leads to the ultimate fragility of the Eurozone: The Greek drama illustrates something important about the governance of the Eurozone. This is a decision mode where one or more creditor nations dictate policy to other countries. This has also happened in Portugal and Ireland.

It is not clear that such a hegemonic decision mode is sustainable in the long run. Should Greece exit the Eurozone? This is the question of the desirability of Grexit; it leads to two sub-questions: Will Greece be better off after Grexit?

Will the rest of the Eurozone be better off? Will Gre: Eacl whether l to politic: First I union. Economists have been debating this issue, but no consensus has emerged. There are impor- tant negative implications of a Grexit. The most important one is that a Grexit is likely to lead the Greek government to default on its debt, which in turn will lead to a banking crisis because the Greek banks are major holders of Greek government bonds.

All this will inten- sify the severity of the economic d0wnturn.

Economics of monetary union (12th edition)

There are also positive effects of a Grexit. The likely devaluation of the new currency can boost the economy and speed up the recovery. Ultimately, if Greece were to exit, this will most likely be based on a political dynamic that we described in the previous section. The answer is most likely negative. A temporary Grexit it is like a temporary divorce. It leads to a dilemma. If Greece does well outside the Eurozone then it is unlikely to be willing to return to a club where it suffered so much.

If, however, Greece does not do well e. So a temporary Grexit makes little sense. It only serves to reduce the guilt feelings of those countries that have pushed out a member state from the monetary union. There are two views about this question.

Let us discuss these. Each time important asymmetric shocks occur, investors would ask the question of whether the adjustment costs of the country concerned may not become too high, leading to political pressures for an exit. In this connection, the idea of a redenomination risk is important. Prior to the exit such unmatched assets and liabilities vis-a-vis other Eurozone countries do not matter as assets and liabilities are expressed in the same currency, the euro.

However, after an exit this is no longer the case because the assets and liabilities are suddenly expressed in a foreign currency. The Eurozone without Greece will become less of an optimal currency area. We represent this view in Fig. It is similar to Fig. The second view is optimistic about the effect of Grexit on the remaining Eurozone.

According to this View, the Eurozone without Greece will face less asymmetric shocks because an outlier country has been ejected. This makes the remaining countries less asym- metric more symmetric and as a result increases the stability of the Eurozone. The effect of Grexit is to make the Eurozone more symmetric.

As a result, the Eurozone without Greece is pushed upwards. This upward push may even put this new Eurozone safely into the OCA zone. The Eurozone will become more sustainable. To conclude: Will there be a Grexit?

At the time of writing, Greece was still in the Euro— zone. The reader will forgive the author of this book for not making a prediction. It is clear, however, that since member-states are sovereign nations, they cannot easily be stopped from exiting the union if they decide to do so. In addition, while the other member countries have no legal instruments to force Greece to exit, they can force that country to do so in other, non-legal ways.

The creditors who have provided loans to Greece may decide to stop this or the ECB could stop providing liquidity to Greek banks. Why is it that the possibility of one country leaving the monetary union is now considered t? This is one of the questions we want to analyse in this section.

D N a: n: A 90 -— 8O -— 21 Figure 5. C stabiliz— leveloped capitalist : stabiliz- iintained. Lutomatic he sever— in adjust— Iave been 3. During minister, isions for the mon- sovereign do so.

How could this happen?

In order to shed light on this question it is useful to start with a discussion of macroeconom- ic developments in Greece since the start of the Eurozone. We do this in Figs 5. The 30 —— Greece 25 —— Eurozone 20 15 Percent 10 The boom in Greece was comparable with the booms observed in Spain and Ireland.

From Fig. So far so good. The trouble with this boom is found in Figs 5.

Monetary Integration in the 1960s

In Fig. Not only did the Greek government switch out these automatic stabilizers, it added to government spending, thereby intensifying the boom. Figure 5. Note that other Eurozone countries, such as Spain and Ireland, also experienced very high increases of private debt. These coun- tries would also get into trouble. Finally Fig. As a result, Greece experienced a strong deterioration of its competitiveness.

Putting all this together we obtain the following picture. Prior to the crisis Greece expe- rienced a strong boom in economic activity. This was made possible by the fact that the private sector borrowed massive amounts of money.

The same boom led to very large wage increases, which reduced the competitiveness of the Greek economy. In addition, in order to restore competitiveness, wages Were cut dramatically Fig. No other Eurozone member country faced such intense adjustments. The intensity of the economic and fiscal crisis in Greece that we just described led to the phenomena we discussed in this chapter and in Chapter 1 Sections 1. Holders of Greek government bonds massively sold these bonds, leading to record high interest rates in Greece, pushing the Greek government into illiquidity and forcing it to institute intense austerity.

Put differently, Greece was forced to switch off the automatic budget stabilizers, intensifying the decline in GDP and the increase in unemployment. Greece was pushed into a bad equilibrium. The Greek drama illustrates two points concerning the costs of a monetary union. First the adjustment costs after a large asymmetric shock can be very high in a monetary union.

These adjustment costs are made more severe in a monetary union because the country cannot devalue the currency.

When these adjustment costs take the intensity they have had in Greece the temptation to exit becomes strong. Second, the fact that the government cannot issue debt in its own currency makes it prone to being pushed into illiquidity and insolvency.

Such a dynamic makes the government help— less and forces it to look for help from creditors. The latter, however, impose their rule, which leads to a loss of sovereignty of the country. From the previous discussion it appears that there is an important interaction between economics and politics. The adjustment mechanism in a monetary union can be extremely painful, leading millions of people into unemployment and poverty for prolonged periods.

Such severe suffering can lead to political upheaval, leading politicians to power who prom— ise a better life outside the monetary union. This, in a way, leads to the ultimate fragility of the Eurozone: large asymmetric shocks lead to such high adjustment costs that they trigger political instability, which ultimately can lead sovereign nations to decide they will be better off outside the monetary union.

The Greek drama illustrates something important about the governance of the Eurozone. This is a decision mode where one or more creditor nations dictate policy to other countries. This has also happened in Portugal and Ireland.

It is not clear that such a hegemonic decision mode is sustainable in the long run. Should Greece exit the Eurozone?

This is the question of the desirability of Grexit; it leads to two sub-questions: Will Greece be better off after Grexit? Will the rest of the Eurozone be better off?