What Have the Crises in Emerging Markets and the Euro Zone in Common and What Differentiates Them?

Abstract

A number of economists have pointed out the key role of international capital flows and current account deficits in the formation of the crises in the periphery of the Euro Zone and have also mentioned their similarities with the crises in emerging market economies (for instance, Krugman 2011; Mansori 2011; and Wolf 2011). They characterize those events as “balance of payments crises”, in contrast to “public debt crises”. Other economists have adopted the same perspective and have produced papers with detailed data and persuasive arguments on the role and effects of capital inflows after the launching of the euro (for instance, Cesaratto and Stirati 2011; Bibow 2012). More recently, Cesaratto (2012) and Bagnai (2012) have developed analyses of the Euro Zone crises making use of our description of the macroeconomic dynamics that precedes the crises in emerging markets (as presented in Frenkel and Rapetti 2009). On the other hand, I became very interested in the comparison between the macroeconomic performances of the Euro Zone and the emerging market countries in early 2010, when the Greek sovereign risk premium began to rise. In a short paper (Frenkel 2010) I discussed the similarities and differences in the country risk premiums applied to each of the sets of countries.

The paper is based on presentations at the 21st Annual Hyman P. Minsky Conference on the State of the US and World Economies “Debts, Deficits and Financial Instability,” organized by the Levy Economics Institute of Bard College in New York, April 11–12, 2012 and at the workshop “The Euro: Manage it or Leave it! The Economic, Social and Political Costs of Crisis Exit Strategies,” Faculty of Economics, Gabriele d’Annunzio University, Pescara, Italy, June 22–3, 2012. A previous version of this paper was presented at the International Economic Association “Roundtable on Debt Crises and their Resolution,” Buenos Aires, August 13–14, 2012. The author thanks the comments and suggestions received in the mentioned seminars and the support of Ford Foundation to the research. The author also thanks the comments by Martín Rapetti and Mario Damill.