The Governance of a Fragile Eurozone

TLDR

Entering a monetary union transforms sovereign debt by removing currency control, exposing member states to market‑driven defaults, fragility, and the possibility of self‑fulfilling multiple equilibria. The paper examines how this fragility affects Eurozone governance, arguing that the ECB’s lender‑of‑last‑resort role and progress toward a budgetary union are essential to mitigate risk.

Abstract

Abstract When entering a monetary union, member countries change the nature of their sovereign debt in a fundamental way; that is, they cease to have control over the currency in which their debt is issued. As a result, financial markets can force these countries’ sovereigns into defaulting. This makes the monetary union fragile and vulnerable to changing market sentiments. It also makes it possible that self‐fulfilling multiple equilibria arise. I analyse the implications of this fragility for the governance of the Eurozone. I argue that the role of the European Central Bank as a lender of last resort is crucial in reducing the fragility of the Eurozone. In addition, steps towards a budgetary union are key in structurally strengthening the union.