Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/89777 
Year of Publication: 
2013
Series/Report no.: 
CESifo Working Paper No. 4471
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
We analyze the similarities and the differences in the fragility of the European Monetary system (EMS) and the Eurozone. We test the hypothesis that in the EMS the fragility arose from the absence of a credible lender of last resort in the foreign exchange markets while in the Eurozone it was the absence of a lender of last resort in the long-term government bond markets that caused the fragility. We conclude that in the EMS the national central banks were weak and fragile, and the national governments were insulated from this weakness by the fact that they kept their own national currencies. In the Eurozone the roles were reversed. The national central banks that became part of the Eurosystem were strengthened. This came at a huge price, i.e. the fragilization of the national governments that could be brought down by the whims of fear and frenzy in financial markets.
Subjects: 
Monetary Union
Eurozone
lender of last resort
JEL: 
F00
Document Type: 
Working Paper
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