A Tale of Politically-Failing Single-Currency Area

16 Pages Posted: 8 Sep 2012

See all articles by Assaf Razin

Assaf Razin

Tel Aviv University - Eitan Berglas School of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Steven S. Rosefielde

University of North Carolina (UNC) at Chapel Hill - Department of Economics

Date Written: September 2012

Abstract

The global financial crisis which erupted in the United States instantaneously swept across Europe. Like the United States, the European Monetary Union (EMU) was ripe for a crash. It had its own real estate bubble, specifically in Ireland and Spain, indulged in excessive deficit spending, financially deregulated, and rapidly expanded credit Policy responses and recovery patterns for key EU members like Germany and France, within the Eurozone, were similar. However, after the bubble burst and the crisis began unfolding it became clear that the Eurozone plight differed from America's in one fundamental respect. There was no exact counterpart of Eurozone GIIPS (Greece, Italy, Ireland, Portugal, and Spain) in the United States. Some American states had over-borrowed, but the sovereign debt crisis didn't place individual states at deflationary risk, or threaten the viability of the federal union. Not so for some members within the Eurozone. Politicians on both sides of the Atlantic can be uncooperative, but inter-state disputes are more easily finessed under the American federal system than the Eurozone politically weakly integrated system. The disparity is traced to the EU's and Eurozone's special form of governance called "supra-nationality" (a partially sovereign transnational organization) that has been largely ignored in economic treatises about the costs and benefits of monetary unions. The EZ members have put themselves in a monetary cage, akin to the gold standard, in which member states have surrendered control over their monetary and foreign exchange rate policies to the German dominated European Central Bank (ECB), without supplementary central fiscal, private banking and political union institutions.

Suggested Citation

Razin, Assaf and Rosefielde, Steven S., A Tale of Politically-Failing Single-Currency Area (September 2012). NBER Working Paper No. w18352. Available at SSRN: https://ssrn.com/abstract=2143539

Assaf Razin (Contact Author)

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel
+972 3 640 7303 (Phone)
+972 3 640 9908 (Fax)

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Steven S. Rosefielde

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )

Chapel Hill, NC 27599
United States

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