Department of Economics, UCSC
The Euro and the global crises: finding the balance between short term stabilization and forward looking reforms
- Author(s): Aizenman, Joshua
- et al.
This paper analyzes reforms and adjustments in the context of the Euro and the global financialcrises. Taking the perspective of the evolutionary approach to institutions, the formation of a newcurrency area is not unidirectional. The process leading to the euro is an example of a commonupbeat and optimistic attitude to the formation of new institutions. Such a Panglossian attitude topolicies may reflect built-in fiscal myopia, possibly both at the level of the principal [the policymaker] and of the agents [consumers and households]. Next, the paper reviews the evolution ofinstitutions buffering the stability of unions in the aftermath of crises, where fiscal restraints andthe allocation of significant bargaining clout to the Federal Center increase the stability of aunion. The paper concludes with an overview of the challenges associated with finding theproper balance between financial integration and financial regulations