Economic imbalances and institutional changes to the euro and the European union

Increasing external and internal imbalances that emerged early since the establishment of the Euro Area rev the serious lack of confidence in the ability of the Euro Area to face challenges resulting from political and economic development in the Euro Area countries as well as the world economy. It has stressed the crucial need to find a systematic and consistent solution to the current problems of the Euro Area. Limited maneuverability of the ECB’s monetary policy induced by the low interest rate environment highlighted increasing role of fiscal policy in reducing negative effects of external and internal shocks on macroeconomic performance of the Euro Area member countries. However, many empirical studies emphasize the existence of asynchronous features strongly embedded in the mix represented by national fiscal policies combined with singly monetary policy that increases heterogeneity among the Euro Area member countries and thus reduces the overall benefits of deeper economic integration. As a result, there is an urgent call for stronger fiscal integration and establishment of the fiscal union within the Euro Area that could bring large number of benefits reducing asymmetric internal and external imbalances in the member countries and, as a result, increase the overall competitiveness of the Euro Area. However, deeper fiscal unification of countries with heterogeneous macroeconomic environment would induce higher occurrence of undesired exogenous shocks. As a result, it seems to be reasonable to consider alternative approaches of the route to fiscal union that are intensively discussed by both economists and politicians. Key pillars of the fiscal union design as well as particular steps toward its establishment faces the problem generally known as trust to institutions due to economic and debt crisis implications. Decreasing confidence and trust to institutions revealed fragility of the institution al framework of the Euro Area that is why the recent crisis put on the agenda to redesign the Euro Area due to the lack of symmetry between “economic” and “monetary” union. However, reduction of excessive economic imbalances that would improve performance and competitiveness of the Euro Area as a whole in the recent post-crisis period requires comprehensive examination of the causes and origins of the recent problems in the European Monetary Union. As many economists (i.e., Paul De Grauwe) suggest, the Euro Area as a very ambitious step forward deeper integration among European economies suffers from the design failures that reduces generally expected outcomes of the single currency. This book provides rigorous insights into the problems inevitably associated with design failures in the Euro Area that contributed to the rise and deepening of the external and internal imbalances within the monetary union.