The Strange Case of the Attack on the Euro Area: Who Is To Blame?

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Óscar Afonso
Universidade do Porto
Portugal
Rui Henrique Alves
Universidade do Porto
Portugal
Vol 21 (2012): Crisis in the Eurozone, Articles
DOI: https://doi.org/10.15304/rge.21.Extra.425
Submitted: 10-10-2012 Accepted: 10-10-2012
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Abstract

In recent months, the euro area has been under fire from the financial markets, spe-culators being blamed for the mounting of a kind of conspiracy whose ultimate goal would be the disintegration of the project's Economic and Monetary Union (EMU).In this paper, we discuss the true reasons of this situation with reference to four issues which the debate remains open since the early 90s: nominal convergence versus real convergence; need –or not– for the coordination of fiscal policies; adjustment mechanisms to specific shocks and the theory of optimum currency areas; and need –or not– for further progress in political integra-tion. Using data on the Portuguese case, we argue that, on several of these topics, the present framework of the EMU still reveals many weaknesses, which would underpin the current unsta-ble situation. In this context, we present some suggestions for strengthening the euro area, par-ticularly in terms of its economic governance.

Keywords:

Euro, EMU, Optimum currency areas, Macroeconomic stabilization, Political union
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