Asymmetric shocks within the euro area – absorption mechanism needed

In 2010, the euro area was hit by the debt crisis in what was a textbook example of an asymmetric shock. While economic output declined massively in the countries affected, it only stagnated in other member countries. Within a monetary union, such asymmetric shocks are difficult to handle. There is no monetary policy that is geared to the requirements of individual member states nor is there any national exchange rate mechanism that would help bring about the required economic adjustment. Given the high indebtedness of the countries affected, fiscal policy measures to stimulate the economy were not an option either during the debt crisis. In order to make the adjustment process less painful and quicker, the euro area needs to find an alternative mechanism to absorb the effects of asymmetric shocks. This mechanism should take effect quickly and automatically, i. e. without any political case-by-case decision making. Otherwise there is a risk that spending that is intended to be anti-cyclical and stabilising will turn out to have a pro-cyclical effect.

Asymmetric shocks within the euro area – absorption mechanism needed(PDF, 65 KB, non-accessible)