The Limits of Surveillance and Financial Market Failure: Some Fundamental Issues Arising from the Euro-Area Crisis

Abstract

Just a few years after the outbreak of the global financial and economic crisis which originated from the US housing market debacle, another financial crisis erupted in the OECD area, this time in the euro area. It was triggered by a sudden loss of market confidence in the sustainability of Greek government debt finance. The crisis soon spread to Ireland and Portugal,¹ and, by the middle of 2011, Spain and Italy were affected by mounting market concern about their sovereign debt. Unlike Greece, several of the latter countries had over the years maintained general government net financial balances in a better form than other member countries, such as Germany and France, which have not suffered from acute financial market stress. But in many of them, private-sector saving shortages relative to domestic investment were covered over years by capital inflows from abroad to match persistent current account deficits.