External imbalances and financial fragility in the euro area
AbstractThis paper presents two views of the European sovereign debt crisis. The first is that the South in the euro zone has been fiscally irresponsible, and has failed to implement supply-side policies such as liberalizing labor markets and the market for services. The second view holds that the crisis reflects a deep divide between the external surpluses of the North and external deficits of the South. Basic stylized facts raise some doubt about the validity of the thesis that the debt crisis in the Eurozone is driven primarily by fiscal fragility in the South. A relatively simple model shows how poor fundamentals can create a debt problem independently of fiscal responsibility. The empirical analysis of the determinants of government bond yield spreads relative to Germany suggests that both views in fact provide useful insights into the roots of the current sovereign crisis. Fiscal fragility and external imbalances explain a significant share of the widening spreads since the onset of the global financial crisis. However, differences in labor productivity growth between North and South assume a much relevant role since the Greek crisis erupted in 2010.
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Bibliographic InfoPaper provided by Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences in its series Mo.Fi.R. Working Papers with number 66.
Date of creation: May 2012
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Sovereign yield spreads; adjustment burden; external imbalances; monetary union;
Find related papers by JEL classification:
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
- F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-05-22 (All new papers)
- NEP-CBA-2012-05-22 (Central Banking)
- NEP-EEC-2012-05-22 (European Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Europa: una crisi di debito o di bilancia dei pagamenti?
by keynesblog in Keynes Blog on 2012-05-23 14:01:03
- Aby zwalczyÄ kryzys potrzeba innych narzÄdzi politycznych
by k.mokrzycka in Obserwator Finansowy on 2012-05-29 04:01:21
- Michele Fratianni, 2012.
"150 years of Italian political unity and economic dualism: An Introduction,"
Mo.Fi.R. Working Papers
73, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
- Michele FRATIANNI, 2012. "150 Years of Italian Political Unity and Economic Dualism:;An Introduction," Rivista Italiana degli Economisti, SIE - Societa' Italiana degli Economisti (I), vol. 17(3), pages 335-346, December.
- Fratianni Michele, 2012. "150 years of Italian political unity and economic dualism: An Introduction," Rivista italiana degli economisti, Società editrice il Mulino, issue 3, pages 335-346.
- Rosaria Rita canale & Ugo Marani, 2012. "Current account and fiscal imbalances in the Euro-area: Siamese twins in an asymmetrical currency union," Department of Economics University of Siena 659, Department of Economics, University of Siena.
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