Abstract
Greece and the other crisis nations of the Western financial crisis are, to a large extent, victims of a dysfunctional international monetary system that has caused multiple financial crises since the collapse of the Bretton Woods system in 1973. In the Eurozone, the government bond market allowed the government of Greece to borrow at favorable rates without taking into account the possibility of default until it was too late. The capital from the surplus countries, Germany and the Netherlands being the most prominent, created housing price booms and housing construction in Ireland and Spain, while the public sector borrowed in Portugal and Greece. The problem of the recipient countries was magnified by imperfect institutions, such as inefficient financial supervision or an inefficient or corrupt political establishment. Thus, financial integration magnified local problems and made them take on an international dimension. The burden of adjustment within the Eurozone has been left largely with the debtor countries. The surplus countries have not reduced their current account surpluses. Though macroeconomic and public sector imbalances have been reduced in Greece, the country continues to lose its young through emigration and a vibrant export sector has not emerged.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
See Aliber (2019) on capital flows and financial crises.
A number of explanations have been put forth to explain the puzzle, such as Coakley et al. (1996) who attributed the finding to countries being concerned about their current account balances since persistent current account deficits raise the risk of a hard landing of the economy. In a more recent paper, Giavazzi and Blanchard (2002) repeated the Feldstein-Horioka estimation using more recent data and found that the puzzle appears to be disappearing in the Eurozone where the coefficient is falling towards zero indicating greater capital market integration and the absence of a relationship between saving and unemployment.
See Calvo (1998) on sudden stops of capital inflows.
See Benediktsdottir et al. (2011) and Johnsen (2014) on Iceland’s financial crisis. Johnsen summarized and extended the results of a parliamentary investigation. See Honohan (2010), Lane (2011, 2014), Bergin et al. (2011), Kinsella (2014) and Ó’Riain (2014) on the Irish crisis. See Mitsopoulos and Pelagidis (2011) on the Greek crisis.
They grew by 11.3% in 2008 and 11.7% in 2009; mostly because of lower imports which fell by 18.2% in 2008 and 24% in 2009 while exports increased by 7.1% in 2008 and 6.2% in 2009.
There is also the paper by Olafsson and Pétursson (2010) who explained the variation in the post-crisis experience of a sample of 46 countries and found that greater exchange rate flexibility coincided with a smaller and shorter contraction and increased the risk of a banking and currency crisis.
See Akerlof and Romer (1993) on bankruptcy for profit. The case can also be made (Dooley 2019) that access to international capital flows increases the incentive for banks to choose a high-risk strategy by making it possible to attract vast amounts of deposits that can be used to generate short-term profits. This makes it possible for bank owners to withdraw bank revenues exceeding the expected loss of capital when the bank fails. In this case, capital controls in the form of required reserves on foreign deposits at domestic financial institutions make the high-risk strategy less attractive to the bank owners.
References
Akerlof, G. A., & Romer, P. M. (1993). Looting: The economic underworld of bankruptcy for profit. Brookings Papers on Economic Activity, 1993(2), 1–73.
Aliber, Robert Z. (2019), “Financial Crisis and Bank Capital,” in The 2008 Global Financial Crisis in Retrospect, Robert Z. Aliber and Gylfi Zoega (eds.), Palgrave Macmillan.
Bank of Greece. (2019). Statistics. Available at: https://www.bankofgreece.gr/Pages/en/Statistics/default.aspx.
Bank of Latvia. (2019). Statistics. Available at: https://www.bank.lv/en/.
Bank of Spain. (2019). Statistics. Available at: https://www.bde.es/bde/en/areas/estadis/.
Benediktsdottir, S., Danielsson, J., & Zoega, G. (2011). Lessons from a collapse of a financial system. Economic Policy, 26(66), 183–235.
Bergin, A., Gerald, J. F., Kearney, I., & O’Sullivan, C. (2011). The Irish fiscal crisis. National Institute Economic Review, 217(1), R47–R59.
Calvo, G. A. (1998). Capital flows and capital-market crises: The simple economics of sudden stops. Journal of Applied Economics, 1(1), 35–54.
Central Bank of Iceland. (2019). Statistics. Available at: https://www.cb.is/statistics/.
Coakley, J., Kulasi, F., & Smith, R. (1996). Current account solvency and the Feldstein--Horioka puzzle. The Economic Journal, 106(436), 620–627.
Dooley, Michael (2019), “Prudential regulations and capital controls.” paper published in The 2008 Global Financial Crisis in Retrospect, Robert Z. Aliber and Gylfi Zoega (eds.), Palgrave-MacMillan, forthcoming.
Economic and Social Research Institute (2019). Research areas. Available at: https://www.esri.ie/research-areas
Eurostat. (2019). Data. Available at: https://ec.europa.eu/eurostat/data/database.
Feldstein, M., & Horioka, C. (1980). Domestic saving and international capital flows. The Economic Journal, 90(358), 314–329.
Giavazzi, Francesco and Olivier Blanchard (2002), “Current account deficits in the euro area: The end of the Feldstein-Horioka puzzle?,” Brookings Papers on Economic Activity. https://www.brookings.edu/bpea-articles/current-account-deficits-in-the-euro-area-the-end-of-the-feldstein-horioka-puzzle/.
Honohan P (2010), “The Irish banking crisis, regulatory and financial stability policy 2003–2008,” Report, Central Bank of Ireland. http://www.bankinginquiry.gov.ie/The%20Irish%20Banking%20Crisis%20Regulatory%20and%20Financial%20Stability%20Policy%202003-2008.pdf.
Iceland Property Registry (2019). https://geo.skra.is/landeignaskra/.
International Monetary Fund (2019). International financial statistics. Available at: http://data.imf.org/?sk=4C514D48-B6BA-49ED-8AB9-52B0C1A0179B.
Johnsen, Guðrún (2014), Bringing down the banking system: Lessons from Iceland,” Palgrave-Macmillan.
Katsimi, Margarita and Gylfi Zoega (2016), “European integration and the Feldstein-Horioka puzzle,” the Oxford Bulletin of Economics and Statistics, 78 (6), (2016), 834–852.
Kinsella, S. (2014). Post-bailout Ireland as the poster child for austerity. CESifo Forum, 15(2), 20–25.
Lane, Philip R. (2011), “The Irish Crisis,” IIIS Discussion Paper No. 356, February. https://www.tcd.ie/triss/assets/PDFs/iiis/iiisdp356.pdf.
Lane, P. (2014). International financial flows and the Irish crisis. In CESifo Forum, volume 15(2), pages 14–19. Ifo Institute for Economic Research at the University of Munich http://www.cesifo-group.de/DocDL/forum2-14-focus3.pdf.
Mitsopoulos, M., & Pelagidis, T. (2011). Understanding the crisis in Greece. New York: Palgrave Macmillan.
Ó’Riain, S. (2014). The rise and fall of Ireland’s Celtic Tiger: Liberalism, boom and bust. Cambridge: Cambridge University Press.
Ober Haus Real Estate Advisors (2019). Available at: http://www.ober-haus.ee/en/.
OECD (2019). Statistical portal: https://stats.oecd.org/.
Olafsson, Thorvardur Tjörvi and Thórarinn G. Pétursson (2010), “Weathering the financial storm: The importance of fundamentals and flexibility.” Paper presented at the conference “the euro area and the financial crisis”, at the National Bank of Slovakia, Bratislava. 6–8 September 2010. Central Bank of Iceland Working Paper #51. https://www.sedlabanki.is/lisalib/getfile.aspx?itemid=8138.
Raza, H., & Zoega, G. (2018). Capital inflows, crisis and recovery in small open economies. Finance Research Letters, 27, 273–282.
Reinhart, C., & Rogoff, K. (2009). This time is different: Eight centuries of financial folly. Princeton: Princeton University Press.
Statistics Iceland (2019). About Statistics Iceland. Available at: https://www.statice.is/about-statistics-iceland/.
Statistics Latvia (2019). Statistics. Available at: https://www.csb.gov.lv/en/statistics.
Statistics Portugal (2019). Web Portal. Available at: https://www.ine.pt/xportal/xmain?xpgid=ine_main&xpid=INE.
World Bank (2019). World Bank Open Data. Available at: https://data.worldbank.org/.
Author information
Authors and Affiliations
Corresponding author
Additional information
Publisher’s Note
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Electronic supplementary material
ESM 1
(DOCX 40 kb)
Rights and permissions
About this article
Cite this article
Zoega, G. Greece and the Western Financial Crisis. Atl Econ J 47, 113–126 (2019). https://doi.org/10.1007/s11293-019-09614-9
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11293-019-09614-9