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Comparative Institutional Advantage in the European Sovereign Debt Crisis

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  • Alison Johnston
  • Bob Hancké & Suman Pant
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    Abstract

    Excessive fiscal spending is commonly cited as a primary cause of the current European sovereign debt crisis. We develop an alternative hypothesis which better accounts for systemic differences towards EMU countries’ exposure to market speculation: the rise of competitiveness imbalances which contributed to national imbalances in total borrowing. We outline that one driver of competitiveness divergence is a country’s capacity to limit sheltered sector wage growth, relative to wage growth in the manufacturing sector. We posit that corporatist institutions which linked sectoral wage developments together in the surplus countries provided them with a comparative wage advantage vis-à-vis EMU’s debtor nations, explaining why the EMU core has emerged relatively unscathed from market speculation during the crisis despite that fact that some of these countries had poor fiscal performances during EMU’s early years. Using a panel regression analysis, we demonstrate that rising differentials between public and manufacturing sector wage growth, as well as wage governance institutions which weakly coordinate exposed and sheltered sectors, are significantly correlated with export decline. We also find that weak governance institutions are significantly associated with more prominent export decline inside a monetary union, compared to outside of monetary union.

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    File URL: http://www.lse.ac.uk/europeanInstitute/LEQS/LEQSPaper66.pdf
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    Bibliographic Info

    Paper provided by London School of Economics / European Institute in its series Europe in Question Discussion Paper Series of the London School of Economics (LEQs) with number 6.

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    Date of creation: 02 Sep 2013
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    Handle: RePEc:erp:leqsxx:p0066

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    Web page: http://www2.lse.ac.uk/europeanInstitute

    Related research

    Keywords: EMU; corporatism;

    References

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    1. Thushyanthan Baskaran & Zohal Hessami, 2013. "Monetary Integration, Soft Budget Constraints, and the EMU Sovereign Debt Crises," Working Paper Series of the Department of Economics, University of Konstanz 2013-03, Department of Economics, University of Konstanz.
    2. Engelbert Stockhammer, 2011. "Peripheral Europe's debt and German wages: the role of wage policy in the Euro area," International Journal of Public Policy, Inderscience Enterprises Ltd, vol. 7(1/2/3), pages 83-96.
    3. Nils Holinski & Clemens Kool & Joan Muysken, 2012. "Persistent macroeconomic imbalances in the Euro area: causes and consequences," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 1-20.
    4. Gros, Daniel, 2012. "Macroeconomic Imbalances in the Euro Area: Symptom or cause of the crisis?," CEPS Papers 6865, Centre for European Policy Studies.
    5. Ansgar Belke & Christian Dreger, 2011. "Current Account Imbalances in the Euro Area: Catching up or Competitiveness?," Discussion Papers of DIW Berlin 1106, DIW Berlin, German Institute for Economic Research.
    6. Philip R. Lane, 2012. "The European Sovereign Debt Crisis," Journal of Economic Perspectives, American Economic Association, vol. 26(3), pages 49-68, Summer.
    7. Dani Rodrik, 1996. "Why Do More Open Economies Have Bigger Governments?," NBER Working Papers 5537, National Bureau of Economic Research, Inc.
    8. Marco Buti & Gabriele Giudice, 2002. "Maastricht's Fiscal Rules at Ten: An Assessment," Journal of Common Market Studies, Wiley Blackwell, vol. 40(5), pages 823-848, December.
    9. Paul Ramskogler, 2013. "The National–Transnational Wage-Setting Nexus in Europe: What have We Learned from the Early Years of Monetary Integration?," Journal of Common Market Studies, Wiley Blackwell, vol. 51(5), pages 916-930, 09.
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