Why Emerging Markets Do Not Hold a Monopoly on Country Risk in the Twenty-First Century: An Analysis of Monetary and Systemic Risks in the OECD and in the Euro-Zone

Abstract

This chapter explores three main risks. First, it addresses the threat of secular stagnation in developed countries where slower growth reinforces the consequences of rising debt leverage. It discusses to what extent this threat affects country risk assessment. Second, it presents an analysis of monetary policy-related systemic risk in the Organization for Economic Co-operation and Development (OECD) and in the Euro-zone region through the challenge of OECD’s central banks to maintain low-interest rate and boosting long-term growth. Third, it discusses the specific case of the Eurozone and the macroeconomic constraints of the Maastricht Treaty. The chapter also includes two case studies—the root causes of the crisis in Greece, Ireland, Portugal, and Spain (so-called PIGS), and common risk factors arising out of the Global Financial Crisis.

The manner in which things exist and take place constitutes what is called the nature of things, and a careful observation of the nature of things is the sole foundation of all truth.

Jean Baptiste Say. A Treatise On Political Economy (1832).

Appendix 11.1 The Maastricht Treaty ’s Convergence Criteria in the Euro-Zone

• Inflation rates: No more than 1.5% higher than the average of the three best performing (lowest inflation) EU member states.

• Annual government deficit : The ratio of the annual government deficit to the gross domestic product (GDP) must not exceed 3% at the end of the preceding fiscal year. If not, it is at least required to reach a level close to 3%. Only exceptional and temporary excesses can be granted for exceptional cases.

• The ratio of gross government debt to GDP must not exceed 60% at the end of the preceding fiscal year. Even if this target cannot be achieved due to specific conditions, the ratio must have sufficiently diminished and must be approaching the reference value at a satisfactory pace. As of mid-2018, of the countries in the Eurozone, only Estonia, Latvia, Lithuania, Slovakia, Luxembourg, Netherlands, and Malta still met this target.

• Exchange rate: Applicant countries should have joined the exchange-rate mechanism (ERM II) under the European Monetary System (EMS) for two consecutive years and should not have devalued their currency during that period.

• Long-term interest rates : The nominal long-term interest rate must not be more than 2 percentage points higher than in the three lowest inflation member states.