Citation

Discussion Paper Details

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Full Details

Title: How the Euro Crisis Evolved and How to Avoid Another: EMU, Fiscal Policy and Credit Ratings

Author(s): Vito Polito and Michael R. Wickens

Publication Date: June 2013

Keyword(s): credit ratings, EMU, euro crisis and fiscal policy

Programme Area(s): International Macroeconomics

Abstract: This paper argues that the crisis was an outcome of EMU: setting a common monetary policy for countries with different initial inflation rates. The crisis countries were those with high inflation rates which then had negative real interest rates and consequently over-borrowed. Current policy discussions focus on crisis measures: fiscal, banking and political union, not avoiding another crisis. This paper suggests two ways to avoid a future crisis: offset an inappropriate monetary policy using fiscal policy; markets could better price loan rates by taking into account default risk. The paper shows that neither was done prior to the crisis.

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Bibliographic Reference

Polito, V and Wickens, M. 2013. 'How the Euro Crisis Evolved and How to Avoid Another: EMU, Fiscal Policy and Credit Ratings'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9521