Instability in the Eurozone?

Instability of the Eurozone? On Monetary Policy, House Prices and Structural Reforms
by
Ansgar Belke and Daniel Gros

This paper deals with potential instabilities of the eurozone stemming from an insufficient interplay between monetary policy and reform effort on the one hand and the emergence of intra-euro area divergences on the other. As a first step, we assess the effect of EMU on structural reform and investigate this question by an examination of the relationship between fixed exchange rates and reform in two wider samples of countries. We also stress that loose monetary conditions which prevailed until some months ago can also manifest themselves in asset price inflation, notably in the housing market. When these bubbles burst, for example, when housing prices stop rising, this often leads to a prolonged period of economic instability and weakness rather than consumer price inflation.