Monetary regimes and macroeconomic stabilization policies within the European economic area : a theoretical and empirical analysis

The introduction of the Euro currency in 1999 represented a major event for the European economies. The 2007 financial crisis and the subsequent 2010 sovereign debt crisis have led to question the sustainability of the Euro area and the capacity of certain member states to fulfil their commitments with respect to the single currency. The numerous austerity plans implemented within the Economic and Monetary Union in the current context of crisis constitute additional arguments for certain states to leave the single currency and retrieve their fiscal and monetary independences. It is not unconceivable anymore for countries such as Greece, Portugal, Ireland, Italy and Spain (the PIIGS) to envisage exiting the Euro area. This thesis considers the issue of determining the optimal monetary regime  flexible exchange rates or monetary union  for the 17 Eurozone countries, accounting for the current financial and sovereign debt crises. Chapter 1 is general and aims at formally establishing the occurrence of a structural break attributable to the 1999 passage to the single currency. It shows that such a break did take place for Euro area countries around 1992, the year which marked the adoption of the Maastricht Treaty and the settlement of the convergence criteria for the Euro. This break is not shared by the three European States which chose to preserve their own currencies (the United Kingdom, Sweden and Denmark). Chapter 2 constitutes the core of this work. It introduces the benchmark model used to perform the comparison between the two monetary regimes considered for the Euro area. It features a two-country open-economy model integrating financial frictions through cross-border interbank markets. Once calibrated for the Euro area, the model suggests that financial rigidities may play a substantial role in the dynamics of Eurozone economies, with a potentially significant impact of shocks affecting the partner economies over national developments. Preliminary financial crisis simulations run on the model prove inconclusive to assess the performances of the two monetary regimes contemplated. On the one hand, the flexible exchange rate regime results in improved stability, but on the other hand the monetary union typically allows for faster recovery following the initial crisis trigger. The third and final chapter meets a double purpose. It first proposes a formal welfare criteria to assess the respective performances of the two monetary regimes under consideration for the Euro area. It then augments the benchmark model with a number of extensions, so as to integrate sovereign debt and the diverse credit policies (Covered Bonds Purchase Programme and Securities Markets Programme) implemented by the ECB since the beginning of the crisis to the basic framework. The results show that absent credit policies, a vast majority of Euro area members (15 out of 17) would enjoy higher welfare levels under a flexible exchange rate regime. These conclusions nevertheless reverse under the Securities Markets Programme, where a majority of member states then favour the monetary union. This suggests that the ECB has a role to play for the Euro area which goes beyond its primary function of monetary policy maker.