Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/109988
Authors: 
Terzi, Andrea
Year of Publication: 
2014
Series/Report no.: 
Working Paper, Levy Economics Institute 810
Abstract: 
With the creation of the Economic and Monetary Union and the euro, the national government debt of eurozone member-states became credit sensitive. While the potentially destabilizing impact of adverse cyclical conditions on credit-sensitive debt was seriously underestimated, the design was intentional, framed within a Friedman-Fischer-Buchanan view that "no monetization" rules provide a powerful means to discipline government behavior. While most countries follow some kind of "no monetization" rule, the one embraced by the eurozone was special, as it also prevented monetization on the secondary market for debt. This made all eurozone public debt defaultable - at least until the European Central Bank (ECB) announced the Outright Monetary Transactionsprogram, which can be seen as an enhanced rule-based approach that makes governments solvent on the condition that they balance their budgets. This has further narrowed Europe's options for policy solutions that are conducive to job creation. An approach that would require no immediate changes in the European Union's (EU) political structure would be for the EU to fund "net government spending in the interest of Europe" through the issue of a eurobond backed by the ECB.
Subjects: 
Euro
Eurozone
Debt Monetization
Sovereign Debt Crisis
Government Budget Constraint
JEL: 
E63
H63
Document Type: 
Working Paper

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