The Re-Emerging Privilege of Euro Area Membership

IMF Working Papers, July 18, 2017

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When the euro was introduced in 1998, one objective was to create an alternative global reserve currency that would grant benefits to euro area countries similar to the U.S. dollar’s “exorbitant privliege”: i.e., a boost to the perceived quality of euro denominated assets that would increase demand for such assets and reduce euro area members’ funding costs.
The paper investigates a measure of privilege asscociated with euro membership derived from investor risk perceptions revealed in investor surveys, and traces its evolution over time.

Uses risk perceptions as revelaed in investor surveys to extract a measure of the euro membership privilege.
Produces time-varying estimates of the weights that investors place on macro-economic fundmentals in their assessments of country risk.

In the 2000s, euro area assets benefited from a significant perceptions premium.
This premium disappeared in the wake of the euro crisis.
The premium has recently returned, although at a reduced size.
The weights of public debt, the current account and real growth increased considerably during the euro crisis.
The shifts in investor weighting of these macro-economic fundmentals have remained in place even after the immediate financial stress subsided.

Subject: Credit ratings, Currencies, Exchange rate arrangements, Foreign exchange, Labor, Money, Public debt, Unemployment rate
Keywords: area membership, area privilege, Credit ratings, Currencies, euro, euro adoption, euro area, euro crisis, Euro premium, Europe, Exchange rate arrangements, exorbitant privlege, governance framework, investor perception, investor perceptions, membership premium, time dummy, Unemployment rate, WP