The Eurozone Needs Exit Rules

25 Pages Posted: 27 Jun 2012

See all articles by Christian Fahrholz

Christian Fahrholz

University of Jena - Economics Department

Cezary Wojcik

Warsaw School of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: June 26, 2012

Abstract

This paper argues that the key issue for defining and solving the Eurozone’s (EZ) difficulties lies in readjusting the relationship between the centre and the periphery of the EZ. Our argument proceeds in two steps. Firstly, the basic finance problem of a centre-periphery system is captured by a threat game with perfect but incomplete information. To get close to the essence of today’s crisis we analyze to what extent a ‘troubled’ periphery EZ member can negotiate a bailout from the center due to the existence of a negative externality arising from its potential default. Secondly, we analyze how establishing ‘exit rules’, which have recently also been advocated by Jacques Delors, would shift the centre-periphery relationship in a way that safeguard the stability of the EZ. We demonstrate that such rules may help limiting the scope for brinkmanship whereby fiscal problems in one member create a negative externality for the rest of the EZ. We show that such rules will strengthen the EZ through at least four channels.

Keywords: sovereign debt crisis, Eurozone, Euro, exit rules, bail-out, political economics, game theory

JEL Classification: E620, F330, H770, C700

Suggested Citation

Fahrholz, Christian and Wojcik, Cezary, The Eurozone Needs Exit Rules (June 26, 2012). CESifo Working Paper Series No. 3845. Available at SSRN: https://ssrn.com/abstract=2092634

Christian Fahrholz

University of Jena - Economics Department ( email )

Carl-Zeiss-Str. 3
07743 Jena
Germany

Cezary Wojcik (Contact Author)

Warsaw School of Economics ( email )

aleja Niepodleglosci 162
PL-Warsaw, 02-554
Poland
+48 22 337 93 65 (Phone)
+48 22 646 61 27 (Fax)

HOME PAGE: http://akson.sgh.waw.pl/~cwojcik/

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
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