Abstract
In order to understand the deeper causes of the ongoing eurozone crisis it is essential to identify a number of factors that collectively impacted the eurozone’s design and undermined the path towards its anticipated success. These factors reflect both economic and structural differences between core and periphery blocks of countries that could be interpreted as internal or intra-zone factors as well as external factors that hugely affected the eurozone’s economic performance. It is therefore important to analyse the eurozone’s policy framework and initially identify how the eurozone performed until 2007 when the global financial crisis hit and how the system subsequently reacted to this external shock. This will reveal the internal flaws of the system that left the eurozone vulnerable to the global economic and financial upheaval and identify possible solutions in order to rescue the eurozone project.
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Notes
- 1.
The 10-year bond yield is often perceived as a strong indicator for sovereign debt.
- 2.
Securitisation is the creation of a security backed by a stream of cash flows from a pool of pre-existing assets.
- 3.
Automatic stabilisers are mechanisms in the economy (mainly related to income taxes and welfare spending) that reduce the amount by which output fluctuates.
- 4.
In their analysis, Trehan and Walsh (1988) also incorporated seignorage in the cointegrating relationship, that is, the real revenue a government acquires by using newly issued money to purchase goods and non-money assets.
- 5.
- 6.
For a brief but comprehensive discussion on the economic logic of debt and banking crises, see Baldwin et al. (2010).
- 7.
Chapter 6 examines the association between fiscal balances and current account balances (the twin-deficit hypothesis) and provides evidence on the extent to which fiscal austerity currently imposed on the south eurozone periphery could be effective in reducing current account imbalances. The sustainability of current account balances is also examined. Chapter 7 further examines the relationship between the real exchange rate and the current account imbalances in the eurozone.
- 8.
Member states are expected to reach their MTOs, or to be heading towards them, by adjusting their structural budgetary positions at a rate of 0.5% of GDP per year as a benchmark (more than 0.5% if debt is above 60% or if sustainability risks are detected).
- 9.
Debt reduction of 5% per year on average over 3 years of the gap to 60%, taking the cycle into account, or respect in the next 2 years. See European Commission (2014).
- 10.
See Baldwin et al. (2010).
- 11.
See EU Shadow Banking Monitor (No. 1, July 2016).
- 12.
In a sense, the government can print money to pay for its expenditures, as reflected in changes in the outstanding stock of non–interest-bearing debt. See Walsh (2003) for an exposition of the consolidated government-sector budget identity.
- 13.
See Lapavitsas et al. (2012).
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Baimbridge, M., Litsios, I., Jackson, K., Lee, U.R. (2017). The Eurozone Crisis: Current Account Imbalances, Budget Deficits and National Debt. In: The Segmentation of Europe. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-137-59013-8_5
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DOI: https://doi.org/10.1057/978-1-137-59013-8_5
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