Free-rider Problems in Eurozone: Inflation, Productivity, and Exchange Rate

Abstract

The Eurozone is experiencing historically high inflation. Following the pandemic recession, the Eurozone as a 19-country currency bloc must strike a balance between credibility and economic development. Rather than a bleak economic outlook, the ECB anticipates a brisk post-pandemic recovery. However, the current situation forces the ECB to choose between Euro credibility and economic prospects. This paper begins by explaining how the Eurozone was created using theories about the fixed exchange rate system and currency union. The article then explains the Euro as a public good from the standpoint of a free-rider problem. When there is no distinction between tradeable and non-tradeable sectors, labor mobility and product mobility can address the majority of concerns. However, in the real world, non-tradeable goods and services abound, and the Eurozone must contend with historically high inflation. As a result, the following section introduces the Balassa-Samuelson Effect to examine Eurozone inflation rates.