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Is the survival of the euro area at risk? An economic analysis of exit and contagion possibilities

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  • Canofari, Paolo
  • Messori, Marcello

Abstract

Our paper analyzes the possibility that the most fragile countries of a monetary union decide to exit when hit by negative external shocks, and can thus also induce the exit of more robust member states (contagion). The paper reaches two main results: (i) the depreciation of the common currency lowers the exit as well as the contagion probabilities; (ii) the non-price competitiveness factors, here stylized in terms of output gap elasticities to the exchange rate, also play a crucial role since higher elasticities of the weakest countries make their exit from the monetary union more likely, and if these same elasticities for the other member states are low enough contagion will never hapepen; The paper also shows that the previous results are deeply affected by the initial assumptions and a number of exogenous variables and structural parameters.

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  • Canofari, Paolo & Messori, Marcello, 2018. "Is the survival of the euro area at risk? An economic analysis of exit and contagion possibilities," Economic Modelling, Elsevier, vol. 69(C), pages 58-66.
    • Handle: RePEc:eee:ecmode:v:69:y:2018:i:c:p:58-66
    DOI: 10.1016/j.econmod.2017.09.007
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    1. Messori, Marcello & Micossi, Stefano, 2018. "Counterproductive Proposals on Euro Area Reform by French and German Economists," CEPS Papers 13438, Centre for European Policy Studies.

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    More about this item

    Keywords

    F30; F31; F41; G01; Euro breakup; Currency crisis; Contagion; Nash equilibria;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G01 - Financial Economics - - General - - - Financial Crises

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