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Modeling the Debt Mechanics of the Euro Zone

In: Growth and International Trade

Author

Listed:
  • Karl Farmer

    (University of Graz)

  • Matthias Schelnast

    (University of Graz)

Abstract

The European Monetary Union is on the verge of collapse. It seems that the late Milton Friedman was right when he diagnosed that the single currency would not survive the first major economic crisis. However, the question still remains as to which economic mechanisms of the currency union have managed to turn the political and cultural heterogeneity of Europe into such severe external imbalances between Northern and Southern euro zone countries that doomsayers are no longer alone in foreseeing a break-up of the euro zone. The main research question addressed in the chapter is the extent to which the external debt accumulation of Southern EMU countries can be attributed to euro capital market integration. We suggest that basically differences in economic fundamentals, associated with the political and cultural heterogeneity of Northern and Southern euro zone countries, were transformed into the observed external imbalances when interest rates converged.

Suggested Citation

  • Karl Farmer & Matthias Schelnast, 2013. "Modeling the Debt Mechanics of the Euro Zone," Springer Texts in Business and Economics, in: Growth and International Trade, edition 127, chapter 18, pages 413-436, Springer.
    • Handle: RePEc:spr:sptchp:978-3-642-33669-0_18
    DOI: 10.1007/978-3-642-33669-0_18
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