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St Catharine's Political Economy Seminar Series - Speaker: Paul De Grauwe

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Talk Title: ‘Flexibility versus Stability. A Difficult Tradeoff in the Euro Area’

Speaker Paul De Grauwe is John Paulson Professor at the London School of Economics. He was a member of the Belgian parliament from 1991 to 2003. He is honorary doctor of the University of Sankt Gallen (Switzerland), the University of Turku (Finland), the University of Genoa and the University of Valencia. He was a visiting professor at various universities: Paris, Amsterdam, Berlin, Kiel, Milan, Pennsylvania and Michigan. He obtained his Ph.D from the Johns Hopkins University in 1974. He is a research fellow at the Centre for European Policy Studies in Brussels and area director ‘Macro, Money and Finance’ at CESifo in Munich. His research interests are in the economics of monetary unions and behavioural macroeconomics. His book publications include ‘The Economics of Monetary Union’, Oxford University Press, 10th Edition, 2014, and ‘Lectures on Behavioral Macroeconomics’, Princeton University Press, 2012.

Talk Overview: Paul De Grauwe will provide empirical evidence that the more important shocks in the Euro Area have been the result of booms and busts driven by waves of optimism and pessimism. These business cycle movements have been relatively well-synchronized. What was not synchronized was the amplitude of these business cycle movements, where some countries experienced much stronger variations in the business cycles than others. In principle these business cycle movements could be stabilized at the national level without the need of a budgetary union. However, as the intensity of these movements is so different, countries experiencing the deepest recession are likely to be hit by ‘sudden stops’, that force them to switch off the automatic stabilizers in the budget, preventing them to do any stabilization. Paul De Grauwe will argue that the only way to deal with these business cycle movements whose amplitude is dis-synchronized, is by introducing a budgetary union. A budgetary union eliminates the destabilizing flows of liquidity between countries during the recession, and the common budgetary authority can allow the automatic stabilizers in the common budget to perform their role in smoothing the business cycle. The new governance of the Euro Area is based on imposing structural reforms. This new governance, however, does not solve the stabilization problem that arises from the fact that the largest part of the asymmetric shocks in the Euro Area finds its origin in booms and busts in economic activity.

This talk is part of the St Catharine's Political Economy Seminar Series series.

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