Chapter

Financial Crises, Sovereign Risk and the Role of Institutions

pp 65-79

Date:

The Endogenous Fragility at European Periphery

A Theoretical Interpretation
  • Nikolay NenovskyAffiliated withCRIISEA, Université de Picardie Jules VerneUniversity of National and World Economy Email author 
  • , Momtchil KarpouzanovAffiliated withEuropean University of Lefke

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Abstract

The current crisis has revealed the co-existence of at least two quite heterogeneous parts of Europe lying hidden behind the unifying and homogenising veil of the European Union membership status. The main hypothesis exposed here is that this stylised division of the EU is largely endogenous and internal to the integration processes themselves. Given the genesis and the designed functioning of the European Union and the Euro-zone a set of centrifugal processes come into play inevitably leading to disintegration. Broadly speaking, the self-propelled breakdown processes come through the creation of “an illusory impression” of safety net and risk insurance in both sub-sets of the EU. This not only increases the overall level of risk and vulnerability but also leads to unfavourable risk redistribution directing it to the weaker links in the whole EU structure. The economic system then becomes much more vulnerable to not only external shocks but also to internal ones. This of course is usually accompanied by loss of discipline and the emergence of various forms of non-market and bandit behaviour in both core and periphery.