Structural Divergences, Institutional Fragilities and Foreign Debt in the Euro Area Crisis

The euro area crisis has been commonly interpreted as due to divergences in economic fundamentals resulting from a deliberate misbehavior of some undisciplined (South European) countries. In the present paper I argue instead that such divergences were due mostly to structural problems that determined the crisis together with the institutional fragility of the Eurozone. I also stress that the public debt issued by a euro area government and held by the residents of a different Eurozone country is foreign debt under all respects, in spite of the fact that those foreign investors use the same currency and belong to the same monetary area. Foreign residents, then, first buy domestic bonds and then they sell them at the smallest sign of weakness and uncertainty, thereby making a self-fulfilling crisis likely to occur. This is what happened after the exogenous Greek shock of 2009, that induced the adoption of fiscal austerity. The crisis came to an end thanks to the role of lender of last resort for governments that the ECB reaffirmed. The solution to avoid future problems, then, should focus mainly on the fixing of the structural and institutional weaknesses of the euro area.