What is the stability of the emu banking sector, Business Law and Ethics

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What is the Stability of the EMU banking sector

Low currency risk, external balance and the stability of the EMU banking sector and financial markets are club goods whose benefits accrue to all member states simultaneously. The importance of these club goods can at the best be illustrated by an example. Let us start from a macroeconomic equilibrium and assume that a large number of EMU member states adopt a tax policy that leads to a slow-down in economic growth and an increase in prices, for example, increase in social security taxes. This raises the general price level in the Euro area. The European Central Bank reacts to this change and increases its interest rate, which upsets the macroeconomic equilibria in the other EMU member states. Obviously, attempts to preserve the price stability would incur some cost to other members also. It clearly means that the existence of EMU club goods may act as a new channel for externalities between national economic policies.

 


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