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Origins and prospects of the Euro existential crisis

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  • Luigi Bonatti

    ()

  • Andrea Fracasso

    ()

Abstract

The current large current account imbalances in the Euro zone reflect persistent diverging trends between the core and the peripheral countries, which were paradoxically reinforced by the very same introduction of the Euro. The reduction in the credit spreads and the increase in capital flows that followed the Euro adoption, permitted to most peripheral countries to fail to uniform their price and wage dynamics, as well as their fiscal policies, to the more disciplined countries. The global financial crisis and the Greek misreporting of budgetary data made the situation precipitate and expose the periphery's deep weakness. Despite some temporary financial assistance from the core countries and the ECB, the long term solution to the situation can only be a rebalancing and real convergence within the Euro zone. Because the core countries are unwilling to accept higher inflation and larger fiscal expenditures, and even less inclined to set up a transfers union, the burden of adjustment will bear on the peripheral countries which will most likely suffer very painful processes of internal devaluation. The long-term future of the Euro, thus, will depend on how the societies and political systems of the Euro periphery will react to the rebalancing process and the sacrifices that this will entail.

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Bibliographic Info

Paper provided by Department of Economics and Management in its series DEM Discussion Papers with number 2013/03.

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Date of creation: 2013
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Handle: RePEc:trn:utwpem:2013/03

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Related research

Keywords: European imbalances; Macroeconomic divergence and adjustment; Germany; Political economy of structural change; Social market economy;

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  1. Philip R. Lane & Gian Maria Milesi-Ferretti, 2007. "Europe and global imbalances," Economic Policy, CEPR & CES & MSH, vol. 22, pages 519-573, 07.
  2. Katsimi, Margarita & Moutos, Thomas, 2010. "EMU and the Greek crisis: The political-economy perspective," European Journal of Political Economy, Elsevier, vol. 26(4), pages 568-576, December.
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  1. [A&C] Origins and prospects of the Euro existential crisis
    by Lorenzo Battisti in Pensieri Economici on 2013-05-07 11:27:00

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