ABSTRACT
The euro crisis illustrates the deficiencies of adjustment mechanisms in a monetary union characterized by a large heterogeneity. Exchange rate adjustments being impossible, few alternative mechanisms are available. Nevertheless, fiscal policy could play an active role. In a federal state like the USA its stabilization coefficient is around 20 per cent (Italianer and Pisani-Ferry, 1992). But there is no equivalent in the European case. Well-integrated capital markets, with portfolio diversification and intra-zone credit, have been proposed as a powerful adjustment mechanism by the ‘international risk sharing’ approach. Intra-zone credit and capital income from international portfolios would have stabilization coefficients around 20–30 per cent each (Asdrubali and Kim, 2004). These results have been used during the 2000s by proponents of liberal economic policies in the EU to promote deeper financial integration without having to develop a federal budget (European Commission, 2007; Trichet, 2007). However, the theoretical basis and the results appear highly questionable (Clévenot and Duwicquet, 2011).
