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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

In spite of the insightful diagnose of the late Milton Friedman that the single currency of the European Economic and Monetary Union (EMU) would not survive the first major economic crisis, the Euro exists since more than two decades. This is all the more surprising as after Euro inception severe external imbalances between Northern and Southern Euro zone countries popped up which brought prominent US economists (Stiglitz 2012; Rodrik 2012) to forecast the collapse of the EMU. In order to understand why these economists feared EMU’s break-up it seems to be expedient to explore the extent to which the external debt accumulation of Southern EMU countries can be attributed to Euro-related 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, 2021. "Modeling the Debt Mechanics of the Euro Zone," Springer Texts in Business and Economics, in: Growth and International Trade, edition 2, chapter 20, pages 479-503, Springer.
    • Handle: RePEc:spr:sptchp:978-3-662-62943-7_20
    DOI: 10.1007/978-3-662-62943-7_20
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