The Impact of 2007/08 Financial Crisis on the Stability and Enlargement of the EMU
Journal
Review of Development Economics
Journal Volume
20
Journal Issue
2
Pages
624-634
Date Issued
2016
Author(s)
Lin, Ya-chi
Abstract
? 2016 John Wiley & Sons Ltd. Before 2007/08, the European Monetary Union (EMU) was expected to be enlarged on schedule, but the European sovereign debt problem, triggered by the exogenous US sub-prime crisis, not only has revealed the EMU's fiscal coordination failure, but also has weakened regional financial integration. The stagnation of financial integration will therefore increase the cost of sustaining a monetary union, which in turn slows EMU enlargement and ruins the reputation of the euro. This paper aims to measure the damage to financial integration and to provide a more precise answer on real interest rate parity (RIP) convergence. Our estimation indicates that RIP between the EMU and some accession candidates is still valid after the interruptions of the financial crises. However, convergence of real interest rates cannot be achieved until 2030. This implies the EMU authority must strengthen regional financial integration to solidify the EMU and then be able to re-start enlargement.
Type
journal article