Discussion paper

DP9521 How the Euro Crisis Evolved and How to Avoid Another: EMU, Fiscal Policy and Credit Ratings

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.

£6.00
Citation

Wickens, M and V Polito (eds) (2013), “DP9521 How the Euro Crisis Evolved and How to Avoid Another: EMU, Fiscal Policy and Credit Ratings”, CEPR Press Discussion Paper No. 9521. https://cepr.org/publications/dp9521