This document analyzes adjustment mechanisms in the Eurozone given heterogeneity between member states. It finds that Northern countries like Germany have large current account surpluses, while Southern countries like Greece have large deficits. Exchange rate misalignments exist, with some currencies undervalued by 13% and others overvalued by 23%. The document uses stock-flow consistent models to simulate the economies of two asymmetric countries in a monetary union. It concludes that Eurobonds could help reduce debt burdens in struggling countries and stimulate recovery, but Northern members fear this could enable continued poor policies in the South. More detail is needed on the foreign exchange rate equilibrium approach used.

1. Interest rates,
Eurobonds and intra-
European exchange
rate misalignments in
the Eurozone
VINCENT DUWICQUET, JAQUES MAZIER, JAMEL SAADAOUI

2. Main focus
 Adjustment mechanisms in a monetary union characterized by a large
heterogeneity.
 Northern European countries have accumulated huge current account
surpluses, while Southern European countries have run current account
deficits.
 Strong structural heterogeneity between European countries.
 Specialization, size productivity, R&D, qualification of the labor force)
 Weakest European countries faced difficulties to finance their deficits as
the financial markets feared sovereign debt default.
 Can not do monetary policy because of the monetary union
 Financial markets concentrated their attacks on the public bonds.

3. Methodology
 FEER approach: Shows exchange rate misalignments. where some
countries extremely undervalued 13% (Germany, Austria, Netherlands and
Finland) others increasingly overrvalued (Greece, Portugal, Spain and
france) 23%
 SFC Model: An asymmetric two-country SFC model of monetary union.
 Allows a consistent description of assets and liabilities of all associated real
and financial flows.
 Two countries (n and s) n is five time larger than s
 This model introduces the possibility of public federal expenditures and
Eurobonds.

5. Conclussion
 European authorities have to react by implementing new economic policies
to achieve sustainable adjustments or else:
 - Competitiveness loss in southern countries induce stagnation
 -Diverging current account imbalances and public debt increases with
rising interest rates.
 Increasing intra-European financing by bank of northern countries
contribute to reduce debt burden, but problem of competitiveness and
public debt would not be solved.

6. Conclussion
 Eurobonds could reduce debt burden and public debt would not suffer as
bad, which make the Eurobonds scenario an important one.
 Eurobonds leads to financing large European project which could impulse
strong recovery in the entire Eurozone.
 Disadvantage: Northern countries fear southern countries would continue
irrelevant policies.

7. Important aspects to be elaborated
 The FEER approach used in this paper is a little unclear, not sure how the
calculate the exchange rate