IDEAS home Printed from https://ideas.repec.org/p/anc/wmofir/66.html
   My bibliography  Save this paper

External imbalances and financial fragility in the euro area

Author

Listed:
  • Pietro Alessandrini

    () (Universit… Politecnica delle Marche, MoFiR)

  • Michele Fratianni

    () (Indiana University, Kelly School of Business, Bloomington US, Univ. Plitecnica Marche and MoFiR)

  • Andrew Hughes Hallett

    () (George Mason University)

  • Andrea Filippo Presbitero

    () (Universit… Politecnica delle Marche, MoFiR)

Abstract

This paper presents two views of the European sovereign debt crisis. The first is that the South in the euro zone has been fiscally irresponsible, and has failed to implement supply-side policies such as liberalizing labor markets and the market for services. The second view holds that the crisis reflects a deep divide between the external surpluses of the North and external deficits of the South. Basic stylized facts raise some doubt about the validity of the thesis that the debt crisis in the Eurozone is driven primarily by fiscal fragility in the South. A relatively simple model shows how poor fundamentals can create a debt problem independently of fiscal responsibility. The empirical analysis of the determinants of government bond yield spreads relative to Germany suggests that both views in fact provide useful insights into the roots of the current sovereign crisis. Fiscal fragility and external imbalances explain a significant share of the widening spreads since the onset of the global financial crisis. However, differences in labor productivity growth between North and South assume a much relevant role since the Greek crisis erupted in 2010.

Suggested Citation

  • Pietro Alessandrini & Michele Fratianni & Andrew Hughes Hallett & Andrea Filippo Presbitero, 2012. "External imbalances and financial fragility in the euro area," Mo.Fi.R. Working Papers 66, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  • Handle: RePEc:anc:wmofir:66
    as

    Download full text from publisher

    File URL: http://docs.dises.univpm.it/web/quaderni/pdfmofir/Mofir066.pdf
    File Function: First version, 2012
    Download Restriction: no

    References listed on IDEAS

    as
    1. Hans-Werner Sinn, 2012. "The European Balance of Payments Crisis: An Introduction," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 13(SPECIALIS), pages 03-10, February.
    2. Hans-Werner Sinn & Timo Wollmershäuser, 2012. "Target loans, current account balances and capital flows: the ECB’s rescue facility," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(4), pages 468-508, August.
    3. Masson, Paul R., 1981. "Dynamic stability of portfolio balance models of the exchange rate," Journal of International Economics, Elsevier, vol. 11(4), pages 467-477, November.
    4. Favero, Carlo & Pagano, Marco & von Thadden, Ernst-Ludwig, 2010. "How Does Liquidity Affect Government Bond Yields?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(01), pages 107-134, February.
    5. Schuknecht, Ludger & von Hagen, Jürgen & Wolswijk, Guido, 2009. "Government risk premiums in the bond market: EMU and Canada," European Journal of Political Economy, Elsevier, vol. 25(3), pages 371-384, September.
    6. Panizza, Ugo & Presbitero, Andrea F., 2014. "Public debt and economic growth: Is there a causal effect?," Journal of Macroeconomics, Elsevier, vol. 41(C), pages 21-41.
    7. Silvia Merler & Jean Pisani-Ferry, 2012. "Sudden Stops in the Euro Area," Review of Economics and Institutions, Università di Perugia, vol. 3(3).
    8. Emiliano Brancaccio, 2008. "Deficit commerciale, crisi di bilancio e politica deflazionista," STUDI ECONOMICI, FrancoAngeli Editore, vol. 2008(96), pages 109-128.
    9. Alois Geyer & Stephan Kossmeier & Stefan Pichler, 2004. "Measuring Systematic Risk in EMU Government Yield Spreads," Review of Finance, Springer, vol. 8(2), pages 171-197.
    10. Lorenzo Codogno & Carlo Favero & Alessandro Missale, 2003. "Yield spreads on EMU government bonds," Economic Policy, CEPR;CES;MSH, vol. 18(37), pages 503-532, October.
    11. Michele Fratianni, 2012. "The Future International Monetary System: Dominant Currencies or Supranational Money? An Introduction," Open Economies Review, Springer, vol. 23(1), pages 1-12, February.
    12. Yakov Amihud & Haim Mendelson, 2006. "Stock and Bond Liquidity and its Effect on Prices and Financial Policies," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 20(1), pages 19-32, April.
    13. Salvador Barrios & Per Iversen & Magdalena Lewandowska & Ralph Setzer, 2009. "Determinants of intra-euro area government bond spreads during the financial crisis," European Economy - Economic Papers 2008 - 2015 388, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    14. J. Bradford DeLong & Lawrence H. Summers, 2012. "Fiscal Policy in a Depressed Economy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 43(1 (Spring), pages 233-297.
    15. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
    16. Lane, Philip R. & Pels, Barbara, 2012. "Current Account Imbalances in Europe," CEPR Discussion Papers 8958, C.E.P.R. Discussion Papers.
    17. Alessandro Beber & Michael W. Brandt & Kenneth A. Kavajecz, 2009. "Flight-to-Quality or Flight-to-Liquidity? Evidence from the Euro-Area Bond Market," Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 925-957, March.
    18. repec:spr:portec:v:1:y:2002:i:2:d:10.1007_s10258-002-0009-9 is not listed on IDEAS
    19. Matthew Higgins & Thomas Klitgaard, 2011. "Saving imbalances and the euro area sovereign debt crisis," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 17(Sept).
    20. Hans-Werner Sinn, 2010. "Rescuing Europe," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 11(SPECIALIS), pages 1-22, August.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Sovereign yield spreads; adjustment burden; external imbalances; monetary union;

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:anc:wmofir:66. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Maurizio Mariotti). General contact details of provider: http://edirc.repec.org/data/mfancit.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.