Adjustment mechanisms in monetary union and European financial integration.

Summary Risk-sharing should make it possible to absorb asymmetric shocks within a monetary zone. Three channels of adjustment can be used: public transfers, credits and financial income between regions/countries. The literature highlights the current weakness of this mechanism in Europe, while it generally tends to attribute a major role to it in the United States. In this paper, we show that for the United States the financial channel is generally overestimated. These results lead us to reassess the role of the federal budget. We complete our analysis with a two-country stock-flow consistent model (SFC) in a monetary union, inspired by the work of Godley and Lavoie (2007). The stabilization effects of financial integration appear weaker than the diffusion effects. We also study the effects of bank rationing on firms and governments. If external financing is accompanied by fiscal austerity plans, the adjustment to an asymmetric shock is inefficient. Finally, stabilization through financial integration is limited and cannot by itself fill the policy vacuum of the eurozone, which is an incomplete monetary union without fiscal mechanisms between countries. This situation accentuates the imbalances between northern and southern countries and calls into question the viability of the euro zone.