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The Eurozone Crisis: Between the Global Financial Crisis and the Structural Imbalances of the EMU

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Europe in Crisis

Abstract

This chapter places the run on the sovereign debt of the so called ‘PIIGS’ group of EU member states (made up of Portugal, Ireland, Italy, Greece and Spain) within the context of the structural imbalances characterising the Economic and Monetary Union (EMU) from the onset.

It is argued that the global financial crisis, given the structural differences of the different Euro Area members states, acted as an asymmetric shock which exacerbated a structural problem of competitiveness embedded in the way in which the EMU was originally devised and implemented. By no means was the crisis only the result of an unsustainable fiscal position in the PIIGS member states. If anything, it confirmed the lack of sustainability of a structurally asymmetric monetary union in the wake of an extremely serious economic shock. This has meant bringing the PIIGS group to the verge of the abyss, despite many voices having warned at the onset of EMU about the need for more symmetric arrangements in Europe and the development of more fiscal and political integration.

This chapter addresses these issues, starting with the unfolding of the Eurozone crisis. It will then identify the structural imbalances of the EMU. Finally, it will assess the solutions that have seemingly been found to the crisis and their impact on the future of the EMU and of the PIIGS within it.

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Notes

  1. 1.

    See Talani, L.S., (ed), (2009), The future of EMU, London: Palgrave.

  2. 2.

    Orlowski, L.T., (2008). Stages of the 2007/2008 Global Financial Crisis: Is There a Wandering Asset-Price Bubble?, Economics Discussion Papers, No 2008–43. http://www.economics-ejournal.org/economics/discussionpapers/2008-43 as accessed on May 18, 2009.

  3. 3.

    Orlowski, L.T., (2008). Stages of the 2007/2008 Global Financial Crisis: Is There a Wandering Asset-Price Bubble?, Economics Discussion Papers, No 2008–43. http://www.economics-ejournal.org/economics/discussionpapers/2008-43as accessed on May 18, 2009.

  4. 4.

    Sinn, H.W., (2010), Casino Capitalism, Oxford: Oxford University Press.

  5. 5.

    Sinn, H.W., (2010), Casino Capitalism, Oxford: Oxford University Press, p. 6.

  6. 6.

    See BBC News, available at http://news.bbc.co.uk/2/hi/business/8671632.stm as accessed on December 22, 2010. See also below this chapter.

  7. 7.

    See BBC News, available at http://www.bbc.co.uk/news/business-11860879 as accessed on December 22, 2010.

  8. 8.

    See BBC News Q&A: The European Stability Mechanism, available online http://www.bbc.co.uk/news/business-19870747 as accessed on October 9, 2012.

  9. 9.

    ECB (2010) Financial Stability Review available online at http://www.ecb.int/pub/fsr/html/summary201012.en.html accessed on December 22, 2010.

  10. 10.

    ECB (2010) Financial Stability Review available online at http://www.ecb.int/pub/fsr/html/summary201012.en.html accessed on December 22, 2010.

  11. 11.

    ECB (2010) Financial Stability Review available online at http://www.ecb.int/pub/fsr/html/summary201012.en.html accessed on December 22, 2010.

  12. 12.

    ECB (2010) Financial Stability Review available online at http://www.ecb.int/pub/fsr/html/summary201012.en.html accessed on December 22, 2010.

  13. 13.

    ECB (2010) Financial Stability Review available online at http://www.ecb.int/pub/fsr/html/summary201012.en.html accessed on December 22, 2010.

  14. 14.

    ECB (2010) Financial Stability Review available online at http://www.ecb.int/pub/fsr/html/summary201012.en.html accessed on December 22, 2010.

  15. 15.

    See Financial Times, June 13th 2012:, available at http://www.ft.com/cms/s/0/d2d42d1e-b36c-11e1-83a9-00144feabdc0.html#axzz1xfURTAr3 as accessed on June 13, 2012.

  16. 16.

    See ECB statistics, available at http://www.ecb.int/stats/gov/html/dashboard.en.html as accessed on October 9, 2012.

  17. 17.

    Ibid.

  18. 18.

    Ibid.

  19. 19.

    Ibid.

  20. 20.

    See Manganelli, S. and Wolswijk, G. (2009),“What drives spreads in the euro area government bond market?”, Economic Policy, 24: 191–240. Arghyrou, M.G. and Kontonikas, A., (2010) The EMU sovereign-debt crisis: Fundamentals, expectations and contagion, Cardiff Economics Working Paper, N. E2010/9. See also Monfort, A., and Renne, J.-P., (2011) Credit and liquidity risks in Eurozone sovereign yield curves. Paris: Banque de France Working Papers Series, n. 352. Haugh, D., Ollivaud, P., D. Turner, (2009) What drives sovereign risk premiums? An analysis of recent evidence from the Eurozone. Paris: OECD Economics Department Working Papers, N. 718. Gerlach, S., Schulz, A. and G.B. Wol (2010).Banking and sovereign risk in the euro area..CEPR Discussion Paper, n. 7833. Attinasi, M.G., Checherita, C., and C. Nickel, (2009). What explains the surge in euro area sovereign spreads during the financial crisis of 2007-09?. ECB Working Paper Series, n. 1131. Barrios, S., Iversen, P., Lewandowska, M. and R. Setzer, (2009) Determinants of intra-Eurozone government bond spreads during the financial crisis. Brussels: European Commission, Directorate General for Economic and Financial Affairs, Economic Papers, N. 388.

  21. 21.

    Manganelli, S. and G. Wolswijk, (2009)“What drives spreads in the euro area government bond market?”. Economic Policy, 24: 191–240.

  22. 22.

    Orlowski, L.T., (2008). Stages of the 2007/2008 GlobalFinancialCrisis: Is There a Wandering Asset-Price Bubble?, Economics Discussion Papers, No 2008–43. http://www.economics-ejournal.org/economics/discussionpapers/2008-43 as accessed on May 18, 2009.

  23. 23.

    Manganelli, S. and G. Wolswijk, (2009) “What drives spreads in the euro area government bond market?”. Economic Policy, 24: 191–240.

  24. 24.

    De Grauwe, P., (1996), International Money, Oxford: Oxford University Press, p. 27.

  25. 25.

    The formula for the RER used here is given by:RER = e (P*/P), where e is the nominal exchange rate (1 in the case of the Eurozone), P* stands for the international prices index (in this particular case, German prices) and P is national price index. The data was obtained from the World Economic Outlook Database of September 2011, available on the IMF’s website http://www.imf.org/external/pubs/ft/weo/2011/02/weodata/index.aspx. Inflation is computed with the average consumer inflation index for all countries. See http://econapproach.blogspot.it/2011/11/real-exchange-rates-and-eurozone-issues.html as accessed on December 27, 2012. For a similar analysis see European Commission, Economic and Financial Affairs (2012), Price and Cost Competitiveness, 1-2/2012, Brussels: EC, web-site:

    http://ec.europa.eu/economy_finance/publications/pcqr/2012/pdf/pccr_1_2_2012_en.pdf, as accessed on December 27, 2012.

  26. 26.

    Talani, L.S., (2009), The future of EMU, London: Palgrave; Eichengreen, B. and Frieden, J. (1994) The political Economy of European Monetary Union, Boulder: Westview Press; Frieden, J. (1991) “Invested interests: the politics of national economic policies in a world of global finance”, International Organization, 45:4, pp. 425-451; Frieden, J. (1994) The impact of goods and capital market integration on European monetary politics, Preliminary version, August; Frieden, J. (1998) The new political economy of EMU, Oxford: Rowman and Littlefield; Moravcsik, A., (1998) The choice for Europe, Ithaca: Cornell University Press.

  27. 27.

    Arghyrou, M.G. and A. Kontonikas, (2010) The EMU sovereign-debt crisis: Fundamentals, expectations and contagion. Cardiff Economics Working Paper, N. E2010/9.

  28. 28.

    Arghyrou, M.G. and A. Kontonikas, (2010) The EMU sovereign-debt crisis: Fundamentals, expectations and contagion. Cardiff Economics Working Paper, N. E2010/9.

    Monfort, A., and J.-P.Renne, (2011) Credit and liquidity risks in Eurozone sovereign yield curves, Paris: Banque de France Working Papers Series, n. 352.

  29. 29.

    Giannone, D., Lenza, Michele, Pill, Huwand Reichlin, Lucrezia (2011), Non-Standard Monetary Policy Measures And Monetary Developments, Brussels: ECB Working Paper Series No 1290.

  30. 30.

    Giannone, D., Lenza, Michele, Pill, Huwand Reichlin, Lucrezia (2011), Non-Standard Monetary Policy Measures And Monetary Developments, Brussels: ECB Working Paper Series No 1290.

  31. 31.

    See Financial Times available at http://lexicon.ft.com/Term?term=long_term-refinancing-operation-_-LTRO as accessed on October 18th, 2012.

  32. 32.

    See ECB monetary policy online, available at http://www.ecb.int/mopo/html/index.en.htm as accessed on October 18th, 2012.

  33. 33.

    See ECB online, available at: http://www.ecb.int/press/pr/date/2012/html/pr120906_1.en.html as accessed on October 24th, 2012.

  34. 34.

    For a chronological listing of the measures see the Annex “Chronology of monetary policy measures of the Eurosystem” in the November 2011 Monthly Bulletin, available at http://www.ecb.int/pub/pdf/mobu/mb201111en.pdf?7e572425fb17ac05bf95689a50691ef3and for details on the ECB’s non-standard measures, including a comparison with the Fed and the Bank of Japan, see “IV. The ECB’s response to the financial crisis” of the former President Trichet’s speech “The ECB’s enhanced credit support” available at http://www.ecb.int/press/key/date/2009/html/sp090713.en.html. For details on the ECB’s response to the financial crisis, see the article “The ECB’s response to the financial crisis” in the October 2010 Monthly Bulletin, available at http://www.ecb.int/pub/pdf/other/art1_mb201010en_pp59-74en.pdf. For details on the ECB’s response to the sovereign debt crisis, see September 2011 Monthly Bulletin, Box 5, available at http://www.ecb.int/pub/pdf/other/box5_mb201109en.pdf.

  35. 35.

    See BBC web-site http://www.bbc.co.uk/news/business-30915210 as accessed on October 22, 2015.

  36. 36.

    See Financial Times, various issues.

  37. 37.

    A summary of the public submissions received can be found on:

    http://ec.Europa.eu/internal_market/consultations/docs/2009/fin_supervision/summary_en.pdf.

  38. 38.

    Teixeira, P.G., (2011), “The regulation of the European Financial Market after the crisis”, in Della Porta, P., and Talani, L.S., (eds), Europe and the Financial Crisis, London: Palgrave.

  39. 39.

    For more details see http://www.consilium.Europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/117747.pdf

    as accessed on December 21, 2010.

  40. 40.

    For more details see

    http://ec.Europa.eu/internal_market/consultations/docs/2009/fin_supervision_may/replies_summary_en.pdf

    and http://ec.Europa.eu/internal_market/finances/docs/committees/supervision/20090923/com2009_501_en.pdf

    As accessed on December 21, 2010.

  41. 41.

    For more details see http://www.time.com/time/world/article/0,8599,2016359,00.html

    as accessed on December 21, 2010.

  42. 42.

    For more details see: http://ec.Europa.eu/internal_market/finances/docs/committees/supervision/20090923/com2009_501_en.pdf

    as accessed on December 21, 2010.

  43. 43.

    For more details see http://www.consilium.Europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/117747.pdf

    as accessed on December 21, 2010.

  44. 44.

    For the full report on the characteristics of the proposed European Banking Union see Sapir et al. (2012).

  45. 45.

    For the text of the three proposals see http://ec.europa.eu/internal_market/finances/committees/index_en.htm#maincontentSec1 as accessed on October 12, 2012.

  46. 46.

    Sapir, A., Hellwig M., and Pagano, M. (2012), “A contribution from the Chair and Vice-Chairs of the Advisory Scientific Committee to the discussion on the European Commission’s banking union proposals”, in Reports of the Advisory Scientific Committee No. 2/October 2012, ESRB available at http://www.esrb.europa.eu/pub/pdf/asc/Reports_ASC_1210.pdf?490dce9cc2a2bf39b76ae4b06604b0ca accessed on October 11, 2012, p.1.

  47. 47.

    See EU web-site http://ec.europa.eu/finance/general-policy/banking-union/index_en.htm

    as accessed on October 22, 2015.

  48. 48.

    See EU web-site http://europa.eu/rapid/midday-express-30-07-2014.htm?locale=en as accessed on October 22, 2015.

  49. 49.

    See http://www.efsf.Europa.eu/about/index.htm as accessed on December 15, 2010.

  50. 50.

    For more details, see http://www.consilium.Europa.eu/uedocs/cms_data/docs/pressdata/en/ec/118578.pdf, as accessed on December 21, 2010.

  51. 51.

    See http://www.efsf.Europa.eu/about/index.htm as accessed on December 15, 2010.

  52. 52.

    The ESM Treaty entered into force on 27 September, 2012. All seventeen euro area member states had ratified by 3 October, 2012.

  53. 53.

    See ESM website, available at http://www.esm.europa.eu/about/index.htm

    As accessed on October 12, 2012.

  54. 54.

    See for example BBC News, available at http://www.bbc.co.uk/news/business-19870747 as accessed on October 12, 2012.

  55. 55.

    See ESM website, available at http://www.esm.europa.eu/about/index.htm

    As accessed on October 12, 2012.

  56. 56.

    For the full text see http://www.european-council.europa.eu/media/639235/st00tscg26_en12.pdf.

  57. 57.

    The Stability and Growth Pact fully entered into force on 1 January 1999 and consists of a rules-based

    framework with both preventive and corrective elements. It initially consisted of Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies, Council Regulation (EC) No 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure and the Resolution of 17 June 1997 on the Stability and Growth Pact. On 20 March 2005 the Council adopted a report entitled “Improving the implementation of the Stability and Growth Pact”. The report was endorsed by the European Council in its conclusions of 22 March 2005, which stated that the report updates and complements the Stability and Growth Pact, of which it is now an integral part. On 27 June 2005 the Pact was complemented by two additional Regulations 1055/05 and 1056/05, amending the Regulations 1466/97 and 1467/97. The Stability and Growth Pact is an essential part of the macroeconomic framework of the Economic and Monetary Union, which contributes to achieving macroeconomic stability in the EU and safeguarding the sustainability of public finances. A rules-based system is the best guarantee for commitments to be enforced and for all member states to be treated equally. The two nominal anchors of the Stability and Growth Pact—the 3 % of GDP reference value for the deficit ratio and the 60 % of GDP reference value for the debt ratio—and the medium-term budgetary objectives are the centrepiece of multilateral surveillance. On 16 November 2011 and 8 November 2011, Regulations 1466/97 and 1467/97 were further amended by Regulation (EU) No 1175/2011 of the European Parliament and of the Council and Council Regulation (EU) No 1177/2011 and flanked by Regulation (EU) No 1173/2011 of the European Parliament and of the Council, which endowed the Stability and Growth Pact with effective enforcement mechanisms for Euro Area member states and on 8 November 2011, the Council adopted Directive 2011/85/EU on requirements for budgetary frameworks of the member states. While not a part of the Stability and Growth Pact, this directive is instrumental to the achievement of its objectives. See http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/coc/2012-01-24.pdf as accessed on October 20th, 2012.

  58. 58.

    Full text available at http://www.european-council.europa.eu/media/639235/st00tscg26_en12.pdf, accessed October 18, 2012.

  59. 59.

    De Grauwe, P., (2012), Interview available at :http://aregan.wordpress.com/2012/03/20/interview-with-paul-de-grauw/,accessed on October 18, 2012.

  60. 60.

    De Grauwe, P., (2012), Interview available at :http://aregan.wordpress.com/2012/03/20/interview-with-paul-de-grauw/, accessed on October 18, 2012.

  61. 61.

    Full text available at http://www.european-council.europa.eu/media/639235/st00tscg26_en12.pdf, accessed October 18, 2012.

  62. 62.

    See EU web-site http://europa.eu/rapid/press-release_IP-15-5240_en.htm

    as accessed on October 22, 2015.

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Talani, L.S. (2016). The Eurozone Crisis: Between the Global Financial Crisis and the Structural Imbalances of the EMU. In: Talani, L. (eds) Europe in Crisis. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-137-57707-8_2

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