Eurozone crisis, asymmetries and fiscal policies.

Summary In a monetary union, such as the euro zone, adjustments to asymmetric developments are more difficult because of the fixity of intra-European exchange rates, as illustrated by the current crisis in southern European countries. An approach based on a "stock-flow consistent" model (SFC) with two asymmetrically sized countries in a monetary union, inspired by the work of Godley and Lavoie [2007], is proposed. Using this model, we simulate a loss of competitiveness in the south of the zone. Five variants are analyzed: fiscal restraint in the South, fiscal expansion in the South, fiscal expansion in the North, fiscal expansion in the whole zone and fiscal expansion in the whole zone with intervention of the European Central Bank (ECB). Several results emerge and illustrate the mechanisms at work in the crisis in southern European countries. The implementation of a restrictive fiscal policy in the South has reduced public debt and interest rates, but at the cost of weaker growth. The effect of a demand-driven stimulus policy in the South is effective on growth in the short term, but has the disadvantage in the medium term of sharply increasing interest rates, plunging the economy into recession. In order to avoid an explosion in interest rates in the south without jeopardizing growth, only a stimulus policy in the north would allow both a boost to production and a reduction in intra-eurozone imbalances. Finally, a stimulus policy for the entire zone is effective for growth while limiting the rise in interest rates, provided that the ECB becomes less independent of the States.