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Title:The Eurozone needs exit rules PDF Logo
Authors:Fahrholz, Christian
Wójcik, Cezary
Issue Date:2012
Series/Report no.:CESifo Working Paper: Monetary Policy and International Finance 3845
Abstract:This paper argues that the key issue for defining and solving the Eurozone's (EZ) difficulties lies in readjusting the relationship between the centre and the periphery of the EZ. Our argument proceeds in two steps. Firstly, the basic finance problem of a centre-periphery system is captured by a threat game with perfect but incomplete information. To get close to the essence of today's crisis we analyze to what extent a troubled periphery EZ member can negotiate a bailout from the center due to the existence of a negative externality arising from its potential default. Secondly, we analyze how establishing exit rules, which have recently also been advocated by Jacques Delors, would shift the centre-periphery relationship in a way that safeguard the stability of the EZ. We demonstrate that such rules may help limiting the scope for brinkmanship whereby fiscal problems in one member create a negative externality for the rest of the EZ. We show that such rules will strengthen the EZ through at least four channels.
Subjects:sovereign debt crisis
Eurozone
Euro
exit rules
bail-out
political economics
game theory
JEL:E62
F33
H77
C70
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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