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Reconnecting the Peripheral Wagons to the Euro Area Core Locomotive: Mission Impossible?

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Name of the Asset | Reconnecting the Peripheral Wagons to the Euro Area Core Locomotive: Mission Impossible?
Type of Asset | Working Paper
Date | December 2016

Summary

The prolonged European debt crisis — exacerbated by economic stagnation and diverse policy responses — has raised questions about the very existence of the Economic and Monetary Union (EMU) and the single currency. This paper investigates the drivers of shock synchronization using quarterly data for 27 European countries over the period 199-2013, comparing the “core” euro area  (the euro area locomotive) with non-core EU member states and EU candidate countries (the peripheral wagons).

The central objectives of the paper are: (i) to investigate whether the euro area core is a driving force behind the shock convergence process in the rest of the EU and the EU candidate countries, with special focus on the different behaviors of peripheral versus transition countries, (ii) to identify the relative importance of various factors driving shock synchronization, and (iii) to propose policy-relevant recommendations. The paper also investigates the effects of the recent economic turmoil on the shock convergence process of the non-core EU members and EU candidate countries.

The findings suggest  the euro area core has not been a strong magnetizer of the shock convergence of peripheral and transition countries since the inception of the euro, as a result of the offsetting effects of various factors that affected the shock convergence process such as divergent fiscal policies, production structure changes and financial flows.  These findings challenge the endogeneity hypothesis and support the specialization paradigm — a concern for the future stability of the euro area.

Authors:

  • Ivana Rajkovic, National Bank of Serbia
  • Aleksandar Stojkov, Iustinianus Primus Faculty of Law at Ss. Cyril and Methodius University
  • lgor Velickovski, National Bank of the Republic of Macedonia

Country and/or Region | Europe
Name of the Program | Global Research Competition
Funder(s) | National Bank of the Republic of Macedonia, the National Bank of Serbia, the University American College Skopje and the Ss. Cyril and Methodius University

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