Report
Understanding economic policy issues in the euro zone
When a currency area is formed, each country loses the possibility of using a national monetary or exchange-rate policy. These two policies are normally replaced by: A more pro-active national fiscal policy; Internal devaluations (reduction in labour costs) to restore competitiveness. The problem in the euro zone is that: Internal devaluations are increasingly rejected because they are too costly (in terms of demand and jobs ); Fiscal policies then bear the full burden of the required economic policy adjustment, but there is a risk of crowding-out (rising long-term interest rates) and a debt crisis. This means that in the end, since highly active fiscal policies must nevertheless be allowed: Either fiscal solidarity appears between the member countries (euro-zone budget ); Or the ECB is doomed to permanent monetisation of fiscal deficits, i.e. fiscal dominance .
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Patrick Artus
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