The Fragility of Two Monetary Regimes: The European Monetary System and the Eurozone

38 Pages Posted: 26 Nov 2013

See all articles by Yuemei Ji

Yuemei Ji

KU Leuven - Faculty of Business and Economics (FEB)

Paul De Grauwe

CESifo (Center for Economic Studies and Ifo Institute for Economic Research); London School of Economics & Political Science (LSE); Centre for Economic Policy Research (CEPR)

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Date Written: November 25, 2013

Abstract

We analyze the similarities and the differences in the fragility of the European Monetary system (EMS) and the Eurozone. We test the hypothesis that in the EMS the fragility arose from the absence of a credible lender of last resort in the foreign exchange markets while in the Eurozone it was the absence of a lender of last resort in the long-term government bond markets that caused the fragility. We conclude that in the EMS the national central banks were weak and fragile, and the national governments were insulated from this weakness by the fact that they kept their own national currencies. In the Eurozone the roles were reversed. The national central banks that became part of the Eurosystem were strengthened. This came at a huge price, i.e. the fragilization of the national governments that could be brought down by the whims of fear and frenzy in financial markets.

Keywords: Monetary Union, Eurozone, lender of last resort

JEL Classification: F00

Suggested Citation

Ji, Yuemei and De Grauwe, Paul and De Grauwe, Paul, The Fragility of Two Monetary Regimes: The European Monetary System and the Eurozone (November 25, 2013). CESifo Working Paper Series No. 4471, Available at SSRN: https://ssrn.com/abstract=2359388 or http://dx.doi.org/10.2139/ssrn.2359388

Yuemei Ji

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Paul De Grauwe (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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