Prof. Enrico Perotti (UvA) speaks at the ESM
"The Euro: A transfer union from the start
A diverse monetary union creates invisible transfers that justify conditional solidarity"
Abstract: A monetary union (MU) among diverse economies enhances trade and financial integration but has also redistributive effects. The common currency lead to implicit de- and re-valuations, boosting productive incentives and fiscal capacity of strong members at the cost of others. The euro was thus a transfer union from the start, with implicit flows from the periphery to the core. A careful form of solidarity is not just required, but even legitimate. Since 2008 the Euro has been plagued by fragility. This has led to sharp contrasts among its members, especially on the legitimacy of cross border support for fiscally struggling periphery countries. The contrast has been widely attributed to the Euro’s design as an institutionally diverse monetary union (DMU) without a common fiscal framework. North (1991) and Acemoglu et al. (2005) gave the insight that governance and contractual institutions reflect deep societal characteristics that shape private and public choices. A general equilibrium analysis of the implicit exchange rate effect offers perspective. The core’s relative success can be seen as the result of its institutions but also of favorable redistributive effects of a common currency, just as the periphery’s difficulties reflect both weaker spending restraint and a higher real fiscal burden induced by the euro. As Martin Wolf wrote in FT, “The Eurozone protected Germany from becoming another Japan. Germans should be thankful for what the euro has given them” (Wolf, 2019).
Enrico Perotti (PhD Finance, MIT 1990) is Professor of International Finance at the University of Amsterdam. His research in banking and corporate finance, organization theory, political economy, legal and financial history has appeared in the top economics and finance journals. He has held visiting appointments at MIT, Harvard, Oxford, Columbia Business School, London Business School, LSE and the IMF. He acted as consultant to the EC, IMF, FSB, World Bank and DNB. He was the 2011 Houblon Normal Fellow in financial stability at the Bank of England and 2015 Wim Duisenberg Fellow at the ECB. He is Fellow of the European Economic Association and Research Fellow at CEPR and Tinbergen Institute.
This is an ESM research internal seminar. If you would like to attend, please write an email to ESMresearch@esm.europa.eu.