THE CRISIS IN THE EURO AREA: AN ANALYTIC OVERVIEW
Heather D. Gibson
Bank of Greece
Theodore Palivos
Athens University of Economics and Business
George S. Tavlas
Bank of Greece
Abstract
This paper provides an introduction to the special issue “The Crisis in the Euro Area”. We take stock of what the euro area crisis has taught us about monetary integration. At the inception of the euro area in 1999, the main parameters of the theory of monetary integration seemed to have been pretty well-settled. Although it was common knowledge that the euro area fell short of fully satisfying all the conditions needed for an optimally-functioning monetary union, most politicians and many economists thought that the euro area satisfied enough conditions so that it would not encounter major difficulties. This paper discusses several developments that came as surprises about the conditions needed for monetary unification as the euro crisis unfolded. These developments include the need of an adequate adjustment mechanism, the links between banking and sovereign crises, and the sharp costs of adjustment to adverse asymmetric shocks.
Keywords: Financial crises, euro-area, monetary integration, optimum currency areas, adjustment mechanism
JEL Classifications: E51, E52, F33, F41, G01
Correspondence:
George Tavlas
Bank of Greece
21 E Venizelos Ave.
Athens, 10250, Greece
Tel. no. +30 210 320 2370
Fax. no. +30 210 320 2432
email address: gtavlas@bankofgreece.gr