The Euro and the global crises: finding the balance between short term stabilization and forward looking reforms
This paper analyzes reforms and adjustments in the context of the Euro and the global financial crises. Taking the perspective of the evolutionary approach to institutions, the formation of a new currency area is not unidirectional. The process leading to the euro is an example of a common upbeat and optimistic attitude to the formation of new institutions. Such a Panglossian attitude to policies may reflect built-in fiscal myopia, possibly both at the level of the principal [the policy maker] and of the agents [consumers and households]. Next, the paper reviews the evolution of institutions buffering the stability of unions in the aftermath of crises, where fiscal restraints and the allocation of significant bargaining clout to the Federal Center increase the stability of a union. The paper concludes with an overview of the challenges associated with finding the proper balance between financial integration and financial regulations.
I would like to thank Michael Bordo, Brian Pinto, Albrecht Ritschl, Federico Sturzenegger, and the participants at the European Monetary Union: Lessons from the Debt Crisis OeNB_40th Conference, May 2012, Vienna, for their comments. Any views presented are those of the author and not the the National Bureau of Economic Research or the Austrian National Bank.