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The Euro Crisis

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  • Clas Wihlborg
  • Thomas D. Willett
  • Nan Zhang

Abstract

The crisis in Greece and other mainly southern Eurozone countries has been discussed primarily as a fiscal issue. Current account deficits of the same countries have received less attention in spite of the relatedness of current account and fiscal deficits. We argue that the failure of many countries within the Eurozone to develop adequate internal adjustment mechanisms is also an important factor behind the crisis. After reviewing the major perspectives that have been offered on the crisis, we present data that support our argument by demonstrating the lack of price and cost convergence in the Eurozone since 1999. Ironically, it seems that the surplus countries have carried out more of the adjustment pointed to by the endogenous optimum currency area (OCA) theory than the deficit countries. We recommend that the responsibility of a ‘European Debt Surveillance Authority’ should include surveillance of intra-euro payment flows, imbalances and adjustment in labour and goods markets, and setting benchmarks for the Eurozone guarantees of sovereign debt based on ability to adjust internally. Thereby, a potential moral hazard problem of an implicit Eurozone guarantee of countries’ sovereign debt could be avoided.

Suggested Citation

  • Clas Wihlborg & Thomas D. Willett & Nan Zhang, 2010. "The Euro Crisis," World Economics, World Economics, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 11(4), pages 51-79, October.
  • Handle: RePEc:wej:wldecn:444
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    Cited by:

    1. Carlo Panico & Francesco Purificato, 2012. "The Role of Institutional and Political Factors in the European Debt Crisis," Working Papers wp280, Political Economy Research Institute, University of Massachusetts at Amherst.

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