The Euro at Twenty: Follies of Youth?

21 Pages Posted: 16 Jan 2019 Last revised: 18 Jan 2019

See all articles by Ricardo Cabral

Ricardo Cabral

Universidade da Madeira; Centre of Applied Economics Studies of the Atlantic (CEEAplA)

F. Louçã

Technical University of Lisbon (UTL) - School of Economics and Management

Date Written: January 17, 2019

Abstract

This paper overviews the early history of the euro and argues that the euro was sub-optimally designed, without monetary sovereignty of Eurozone (EZ) Member States, in order to comply with political goals set by wealthier Member States. Given this constraint, the euro architects designed a single currency in which its irreversibility is achieved through the EZ banking system, with recourse to the TARGET2 payment system. This allowed the banking systems of deficit Member States to fund large cumulative current account deficits in the first decade of the euro. The euro crisis led EZ policy makers to define new far more demanding fiscal rules and a new Banking Union to constrain the ability of EZ banking systems to fund sovereigns and current account deficits. Thus, the euro at twenty has become more fragile.

Keywords: Euro Crisis, Fiscal Rules, Banking Union, Eurozone, Austerity Strategy

JEL Classification: F45, F32, F34, E62, E52, F36, F42

Suggested Citation

Cabral, Ricardo and Louçã, Francisco, The Euro at Twenty: Follies of Youth? (January 17, 2019). Available at SSRN: https://ssrn.com/abstract=3315354 or http://dx.doi.org/10.2139/ssrn.3315354

Ricardo Cabral (Contact Author)

Universidade da Madeira ( email )

Campus Universitario da Penteada
9000-390 Funchal
Portugal

Centre of Applied Economics Studies of the Atlantic (CEEAplA)

Portugal

Francisco Louçã

Technical University of Lisbon (UTL) - School of Economics and Management ( email )

R. Miguel Lupi, 20
Lisbon, 1200
Portugal

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