The Evolution and the Current Status of the European Financial Crisis

Abstract

A useful initial examination of the European financial crisis can be based on a stock and flow analysis of critical variables, and on a short and long-term time analysis. The main issues shaping the crisis are: weak actual and potential growth; competitive weakness; liquidation of banks and sovereigns; large debt-to-GDP ratios; and considerable liability stocks (government, private, and non-private sector). The four features (stocks/flows, and short/long-term maturity) are impacted by the problematic structure of the European crisis, and suggested policy solutions for one feature tend to have a negative influence on the opposite feature. Short-term solutions do not favor long-term prospects, and vice versa. Stock rebalancing policies do not favor flow imbalances, and vice versa. The cycle of austerity, deleveraging and deflation experienced in Europe in recent years has been amplified by excess debt, contagion between sovereigns and banks, and the economic policies chosen by member states. Although the crisis is following a predictable evolution, it is difficult to estimate how long it might last.