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Origins and prospects of the Euro existential crisis


  • Luigi Bonatti


  • Andrea Fracasso



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.

Suggested Citation

  • Luigi Bonatti & Andrea Fracasso, 2013. "Origins and prospects of the Euro existential crisis," DEM Discussion Papers 2013/03, Department of Economics and Management.
  • Handle: RePEc:trn:utwpem:2013/03

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    References listed on IDEAS

    1. Philip R. Lane & Gian Maria Milesi-Ferretti, 2007. "Europe and global imbalances," Economic Policy, CEPR;CES;MSH, vol. 22, pages 519-573, July.
    2. Wendy Carlin, 2013. "Real Exchange Rate Adjustment, Wage-Setting Institutions, and Fiscal Stabilization Policy: Lessons of the Eurozone's First Decade," CESifo Economic Studies, CESifo, vol. 59(3), pages 489-519, September.
    3. 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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    Blog mentions

    As found by, the blog aggregator for Economics research:
    1. [A&C] Origins and prospects of the Euro existential crisis
      by Lorenzo Battisti in Pensieri Economici on 2013-05-07 16:27:00

    More about this item


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

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions

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