The International Impact of a Fragile Emu1

We quantify the international impact of euro area stress shocks, arising from the incomplete nature of EMU. We disentangle such shocks from more general global risk aversion shocks by using sign, magnitude and narrative restrictions in a daily Structural Vector Autoregression (SVAR) model with financial variables. We then assess the impact of euro area stress shocks on macroeconomic variables in euro area and non-euro area countries via panel local projections. We find that these shocks lead to a slowdown of economic and trade activity not only for in euro area, but also in the rest of the world. Hence we conclude that a more complete EMU in terms of a more perfect economic and financial union would be a global public good for the world economy, beyond being desirable on its own right