Dealing with the consequences of exchange rate misalignments for macroeconomic adjustments in the EMU

The euro crisis sheds light on the nature of alternative adjustment mechanisms in the EMU. This article examines the exchange rate misalignments within the euro zone, using a FEER approach. To explore the consequences of these misalignments, we use an open economy SFC model with endogenous interest rates and Eurobonds. Facing a competitiveness loss in southern countries due to misalignments, three sets of alternative economic policy are investigated: a policy‐mix based on tax rebates to improve competitiveness; an increase in intra‐European financing by banks of northern countries; and an issuance of Eurobonds to pool European sovereign debt.