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The Euro Imbalances and Financial Deregulation: A Post-Keynesian Interpretation of the European Debt Crisis

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  • Esteban Perez-Caldentey
  • Matias Vernengo

Abstract

Conventional wisdom suggests that the European debt crisis, which has thus far led to severe adjustment programs crafted by the European Union and the International Monetary Fund in both Greece and Ireland, was caused by fiscal profligacy on the part of peripheral, or noncore, countries in combination with a welfare state model, and that the role of the common currency-the euro-was at best minimal. This paper aims to show that, contrary to conventional wisdom, the crisis in Europe is the result of an imbalance between core and noncore countries that is inherent in the euro economic model. Underpinned by a process of monetary unification and financial deregulation, core eurozone countries pursued export-led growth policies-or, more specifically, "beggar thy neighbor" policies-at the expense of mounting disequilibria and debt accumulation in the periphery. This imbalance became unsustainable, and this unsustainability was a causal factor in the global financial crisis of 2007-08. The paper also maintains that the eurozone could avoid cumulative imbalances by adopting John Maynard Keynes's notion of the generalized banking principle (a fundamental principle of his clearing union proposal) as a central element of its monetary integration arrangement.

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Bibliographic Info

Paper provided by Levy Economics Institute, The in its series Economics Working Paper Archive with number wp_702.

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Date of creation: Jan 2012
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Handle: RePEc:lev:wrkpap:wp_702

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Related research

Keywords: European Union; Current Account Adjustment; Financial Aspects of Economic Integration;

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  1. Sergio Cesaratto & Antonella Stirati, 2011. "Germany and the European and Global Crises," Department of Economics University of Siena 607, Department of Economics, University of Siena.
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Cited by:
  1. Botta, Alberto, 2012. "Conflicting Claims in Eurozone? Austerity’s Myopic Logic and the Need of a European federal union in a post-Keynesian Eurozone Center-Periphery Model," MPRA Paper 41700, University Library of Munich, Germany.
  2. Alberto Botta, 2012. "Conflicting Claims in the Eurozone? Austerity’s Myopic Logic and the Need for a European Federal Union in a post-Keynesian Eurozone Center-Periphery Model," DEM Working Papers Series 011, University of Pavia, Department of Economics and Management.
  3. Hubert Gabrisch & Karsten Staehr, 2012. "The Euro Plus Pact: Competitiveness and external capital flows in the EU countries," Bank of Estonia Working Papers wp2012-5, Bank of Estonia, revised 10 Dec 2012.

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