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The credit crisis in the Euro zone: implications for Israel

Senat # 399 - 12/5/2010


The Euro zone was launched in 1999 with 11 member states, and by 2009 another five EU states joined it. The main dilemma which occupied the founders of the zone was the temptation of the governments in member states to develop large deficits, with the interest rate at the same level for all the zone’s countries and therefore not serving to punish a spendthrift government. Two solutions to this problem were first the prohibition in the Maastricht Treaty (the legal basis of the Euro zone) of the rescue of governments from their deficits, and second the signing of a Stability and Growth Pact (SGP) which restricts the amount of public deficits. Another significant challenge to the zone’s members is contending with asymmetrical shocks, that is, shocks which have a differential impact on the various members.

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