On the European debt crisis

Beker, Victor (2014): On the European debt crisis.

Abstract

A common explanation for the European debt crisis has been that the introduction of the euro in 2001 caused interest rates to fall in those countries where expectations of high inflation previously kept interest rates high. Bond buyers assumed that a bond issued by any government in the European Monetary Union was equally safe. As a result, the interest rates on Greek, Italian, etc. government bonds were not significantly different from the interest rate on the German government bonds. Governments responded to the low interest rates by increasing their borrowing. However, data do not endorse this explanation, as is shown in the paper. An alternative explanation has been that the European debt crisis was just a consequence of the American subprime one. Again, data do not entirely support this hypothesis although the connection between both crises is explored in the paper. A third argument states that the introduction of the euro, and its effects on external competitiveness, triggered mounting disequilibria and debt accumulation in the noncore countries or periphery. This argument seems to be valid to a certain extent just in the cases of Greece and Portugal, but not for the rest of the countries involved in the crisis where other factors seem to have played a major role. A distinction is made between a first group of countries whose debt problems have roots before 2007 but did not worsen significantly after that year and a second one of ¨new¨ highly indebted countries. Finally, Spain appears as a special case. The development of the indebtedness process in these three different types of countries allows isolating the factors which were determinant in each case. The conclusion is that the European indebtedness process does not accept a unique explanation and its solution will necessarily require resource transfers from the richer to the poorer countries of the euro-zone.The mechanism of the European redemption pact proposed in the 2011 annual report of the German Council of Economic Experts (GCEE) may be one way of doing this.

• Item Type: MPRA Paper
• Language: English
• Keywords: Keywords: sovereign-debt crisis, euro-zone, budget deficit.
• Subjects: F - International Economics > F3 - International Finance; F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems

References

Abell, J.D. (1990):”Twin Deficits During the 1980’s: An Empirical Investigation”, Journal of Macroeconomics, 12, 81-96.

Alesina A, and Tabellini G. 1990. A positive theory of fiscal deficits and government debt. Rev.Econ. Stud.,57, 403–14.

Alkswani, M. (2000).The Twin Deficits Phenomenon in Petroleum Economy: Evidence from Saudi Arabia. Paper presented at the seventh annual conference, economic research forum (ERF).http://www.erf.org.eg/CMS/uploads/pdf/1185358196_finance1.pdf

André, C. (2010). A Bird´s Eye View of OECD Housing Markets.OECD Economics Department Working Papers, No. 746, OECD Publishing.http://www.cchpr.landecon.cam.ac.uk/Conference2010/Downloads/Papers/Plenary/Andre%20C%20Paper.pdf

Arellano, M. and Bentolila, S. (2009). La burbuja inmobiliaria: causas y responsables. In La Crisis de la Economía Española: Lecciones y Propuestas, FEDEA, 28-31. http://www.crisis09.es/PDF/la-crisis-de-la-economia-espanola.pdf

Anoruo, E. and Ramchander, S. (1998). Current Account and Fiscal Deficits: Evidence from Five Developing Economies of Asia. Journal of Asian Economics, 9, 487-501.

Beker, V. A. (2008).Trade Liberalization, Inequality and Unemployment: Lessons from the Argentine Case.http://dx.doi.org/10.2139/ssrn.1126402

Beker, V. A. (2010). On the economic crisis and the crisis of economics. Economics Discussion Papers 2010-18.Kiel Institute for the World Economy.http://econstor.eu/bitstream/10419/36658/1/630979766.pdf

Bianchi, J. (2011). Overborrowing and Systemic Externalities in the Business Cycle. American Economic Review,101, December, 3400–3426.

Bolton, P. and Jeanne, O. (2011).Sovereign default risk and bank fragility in financially integrated economies.IMF Economic Review, 59, 162–194. http://www.palgrave-journals.com/imfer/journal/v59/n2/abs/imfer20115a.html

Bordo, M. D.,Eichengreen, B., Klingebiel, D. and Martinez-Peria, M. S. (2001). Is the Crisis Problem Growing More Severe? Economic Policy 16, April, 51–82.

Bordo, M. D. and Murshid, A. P. (2001).Are Financial Crises Becoming Increasingly More Contagious? What Is the Historical Evidence?in Forbes, K. and Claessens, S., eds., International Financial Contagion: How It Spreads and How It Can be Stopped, New York, Kluwer Academic Publications, 367–406.

Borio, C. and Disyatat, P. (2011).Global imbalances and the financial crisis: Link or no link? BIS Working Papers No 346.

Bracke, T. and Fidora, M. (2012).The macro-financial factors behind the crisis: Global liquidity glut or global savings glut?The North American Journal of Economics and Finance. Volume 23, Issue 2, August, 185–202.

Bugamelli, M., Cristadoro, R. and Zevi, G. (2009), La crisi internazionale e il sistema produttivoitaliano:un’analisi su dati a livello di impresa, Occasional Papers 58, Banca d'Italia,Rome.http://www.bancaditalia.it/pubblicazioni/econo/quest_ecofin_2/QF_58

Carlin, W. (1998).The new East German economy: problems of transition, unification and institutional mis-match. University College London.http://www.ucl.ac.uk/~uctpa36/East%20Germany%203%20problems.pdf

Cavallo, M. (2005).Government Consumption Expenditures and the Current Account. Federal Reserve Bank of San Francisco.Working Paper 2005-03.http://www.frbsf.org/publications/economics/papers/2005/wp05-03bk.pdf

Dewald, W.G. and Ulan, M. (1990): The Twin Deficit Illusion. Cato Journal, 10, 689- 707.

Di Quirico, R. (2010). Italy and the Global Economic Crisis. Bulletin of Italian Politics.Vol. 2, No. 2, pp. 3-19.URL: http://www.gla.ac.uk/media/media_191024_en.pdf

Eichengreen, B., and Lindert, P. H.(1989,), eds. The International Debt Crisis in HistoricalPerspective.Cambridge: MIT Press.

Eichengreen, B. and Park, B. (2012).The World Economy after the Global Crisis. A New Economic Order for the 21st Century. World Scientific Studies in International Economics

Éltető, A.(2011). Portugal and Spain: causes and Effects of the crisis. Baltic Journal of European Studies, vol.1 no. 2, September, 34/48.http://www.ies.ee/iesp/No10/bjes_no10.pdf#page=34

Enders, W. and Lee, B.S. (1990):” Current Account and Budget Deficits: Twins or Distant Cousins?”. The Review of Economics and Statistics.72, 373-81.

Erceg, C. and Guerrieri, L.(2005). Expansionary Fiscal Shocks and the Trade Deficit, Computing in Economics and Finance, Society for Computational Economics.

Farhi, E. and Tirole, J. Collective moral hazard, maturity mismatch and systemic bailouts. N.B.E.R. Working Paper 15138.www.nber.org/papers/w15138

Farhi, E. and andTirole, J. (2009).Collective Moral Hazard, Maturity Mismatch and Systemic Bailouts. Toulouse School of Economics Working Paper.http://www.tse-fr.eu/images/doc/wp/ng/wp_nogroup_52_2009.pdf

Feldstein, M. (2012).The Failure of the Euro.Foreign Affairs, January-February. http://www.foreignaffairs.com/articles/136752/martin-feldstein/the-failure-of-the-euro

Frenkel, R. (2012). Lessons from a comparative analysis of financial crises. INFER Workshop on The Euro: manage it or leave it! Faculty of Economics, Gabriele d'Annunzio University, Pescara, June 22-23.

Frenkel, R. (2013) . What have the crises in emerging markets and the Euro zone in common and what differentiate them?. http://www.itf.org.ar/pdf/lecturas/lectura67.pdf

Georgantopoulos, A. G. and Tsamis, A. (2011).The Macroeconomic Effects of Budget Deficits in Greece: A VAR-VECM Approach. International Research Journal of Finance and Economics. Issue 79, December, pp. 156-166.

German Council of Economic Experts (2011). Annual Report 2011/12. Assume responsibility for Europe”. Wiesbaden.

Gianviti, F., Krueger, A., Pisani-Ferry, J., Sapir, A. and von Hagen, J. (2010). A European Mechanism for Sovereign Debt Crisis Resolution: A Proposal. Bruegel.http://aei.pitt.edu/15123/1/101109_BP_Debt_resolution_BP_clean_01.pdf

Goldstein, M., G. Kaminsky and C. Reinhart (1999), Assessing Vulnerability. Institute for International Finance, Washington, D.C. http://mpra.ub.uni-muenchen.de/13629/

Governor of the Central Bank of Ireland (2010).The Irish Banking Crisis Regulatory and Financial Stability Policy 2003-2008.http://www.financialregulator.ie/press-area/pressreleases/Pages/TheIrishBankingCrisis,RegulatoryandFinancialStabilityPolicy2003%E2%80%932008.aspx

Islam, M. F. (1998). “Brazil’s Twin Deficits: An Empirical Examination.” Atlantic Economic Journal, no. 2, pp. 121-28.

Katsimi, M. and Moutos, T. (2010). “EMU and the Greek Crisis,” European Journal of Political Economy, December, 26(4), 568-576.

Khalid, A.M and Teo, W.G. (1999) “Causality Tests of Budget and Current Account Deficits: Cross-Country Comparisons” Empirical Economics, 24, 389-402.

Kim.K.H. (1995): On the Long-run Determinants of the US Trade Balance: A Comment. Journal of Post Keynesian Economics.17, 447-55.

Lane, P.R.(2010).The Irish Crisis. IIIS Discussion Paper No.356.http://www.tcd.ie/iiis/documents/discussion/pdfs/iiisdp356.pdf

Lapavitsas, K. (2012). Crisis in the Eurozone. Verso, London.

Leachman, L. L. and Francis, B. 2002.Twin Deficits: Apparition or Reality? Applied Economics, Vol. 34, p. 1121-32.

Manganelli, S. and Wolswijk, G. (2007).Market discipline, financial integration and fiscal rules: what drives spreads in the euro area government bond market? Working Paper Series 745, European Central Bank.http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp745.pdf

McKinsey Global Institute (2011).Debt and deleveraging: The global credit bubble and its economic consequences (Updated Analysis). http://www.mckinsey.com/insights/mgi/research/financial_markets/debt_and_deleveraging_the_global_credit_bubble_update

Miller, S.M. and Russek, F.S. (1989): “Are the Twin Deficits Really Related?” Contemporary Policy Issues. 7, 91-115.

Milne, A. (2013). Register, Cap and Trade: A Proposal for Containing Systemic Liquidity Risk. Economics: The Open-Access, Open-Assessment E-Journal, Vol. 7, 2013-7. http://dx.doi.org/10.5018/economics-ejournal.ja.2013-7

Minsky, H. P.(1992). The Financial Instability Hypothesis. The Jerome Levy Economics Institute of Bard College. Working Paper No. 74.http://www.levyinstitute.org/pubs/wp74.pdf

Miranda, M. S. and Calvo Hornero, A. Evolution of the Spanish and Italian Banking in the Financial World Crisis. http://xivrem.ujaen.es/wp-content/uploads/2012/05/14-R-040M403.pdf

Mukhtar, T., Zakaria, M., and Ahmed, M. (2007). An empirical investigation for the twin deficits in Pakistan.Journal of Economic Cooperation, 28,4, 63-80.

Pagano, M. and vonThadden, E. L. (2004).The European Bond Markets under EMU. Oxford Review of Economic Policy, Oxford University Press, vol. 20(4), 531-554, Winter.

Paniza, U. (2013). Do We Need a Mechanism for Solving Sovereign Debt Crises? A Rule-Based Discussion. Graduate Institute of International and Development Studies Working Paper No: 03/2013. http://repec.graduateinstitute.ch/pdfs/Working_papers/HEIDWP03-2013.pdf

Pérez-Caldentey, E. and Vernengo, M. (2012).The Euro Imbalances and Financial Deregulation: A Post-Keynesian Interpretation of the European Debt Crisis. Levy Economics Institute of Bard College Working Paper No. 702.http://www.levyinstitute.org/pubs/wp_702.pdf

Piersanti, G., (2000). Current account dynamics and expected future budget deficits: some international evidence. Journal of International Money and Finance, Elsevier, vol. 19(2), 255-271, April.

Reinhart, C.M. and Rogoff, K.S. (2004) Serial Default and the ¨Paradox¨ of Rich to Poor Capital Flows. National Bureau of Economic Research. Working Paper 10296.http://www.nber.org/papers/w10296

Reinhart, C. M., and Kenneth S. Rogoff. K. S. (2008a). Banking Crises: An Equal Opportunity Menace. National Bureau of Economic Research Working Paper 14587.

Reinhart, Carmen M., and Kenneth S. Rogoff. 2008b. This Time is Different: A Panoramic View of Eight Centuries of Financial Crises. NBER Working Paper No. 13882

Reinhart, C. M., Rogoff, K. S. and Savastano, M. A. (2003).Debt Intolerance. Brookings Papers on Economic Activity, Vol.1, Spring, 1–74.

Roubini, N. (2001). Debt Sustainability: How to Assess Whether a Country is Insolvent. Stern School of Business, New York University. http://people.stern.nyu.edu/nroubini/papers/debtsustainability.pdf

Schich, S. (2008).Challenges Related to Financial Guarantee Insurance. Financial Market Trends, OECD, 81-113.

Schneider and Kirchgässner (2009).Financial and world economic crisis: What did economists contribute? Public Choice. Springer. Vol. 140(3), September, 319-327.

Sturzenegger, F. and Zettlemeyer, J. (2006). Debt Defaults and Lessons from a Decade of Crises Cambridge: MIT Press.

Tichy, G. (2011)). Could we have foreseen the financial crisis? In Streissler, E. andTichy, G., eds., How to Forecast Economic Developments During and After Crises. Austrian Academy of Sciences, Vienna.

Tomz, M. and Wright, M.L. J. (2007) Do Countries Default in “Bad Times”? Journal of the European Economic Association, 5(2-3), April-May, 352-60.

Véron, N. (20112). Financial Reform after the Crisis, in Eichengreen and Park (Eds.), The World Economy after the Global Crisis. A New Economic Order for the 21st Century. World Scientific Studies in International Economics. Chapter 2.