Academic journal article The European Journal of Comparative Economics

Financial and Real Crisis in the Eurozone and Vulnerable Economies

Academic journal article The European Journal of Comparative Economics

Financial and Real Crisis in the Eurozone and Vulnerable Economies

Article excerpt

1. Introduction

The standard account of the international crisis is that it started in the United States and was due to lax regulation that fostered excess credit, financial and real bubbles, and financial disequilibria. In spite of massive government support to financial institutions in trouble, the crisis soon spread to the real economy and engendered a "great contraction".

Initially, the European Union seemed to be in a rather safe position, with the exception of macroeconomically unbalanced small economies (Greece, Hungary, Ireland), where the crisis had already been apparent in 2008. The Eurozone was considered unassailable, thanks to the virtues of integration, the Euro, and the features of continental capitalism. The latter include lower financial depth and integration, prudent financial regulation, and cautious behaviour by financial institutions, in particular banks.

Six years into the crisis the picture is dramatically different The Eurozone is now the problem for the world economy. Its financial situation is shaken, the Euro is in trouble, and the future itself of European integration is at stake. European policymakers are engaged in intense debate and trying to find solutions. Typically, policymaking concentrates on financial and monetary issues, with institutional implications. The success of financial and monetary stabilisation is seen as a necessary precondition for the revival of the real economy.

It is of interest that the European Commission report on the first ten years of EMU stressed that disregarding non-fiscal dimensions such as competitiveness, credit booms and current-account deficits was a mistake (European Commission, 2008). However, financial issues have dominated debates and policy-making, and efforts have concentrated on the need to strengthen the financial situation and action of the Union and its member countries. Such critical issues as diverging productivity rates and levels within the Eurozone, the sudden reversal of capital flows between the north and the south of the Eurozone, or the divergence of real exchange rates and their consequences for the integration and sustainability of the Eurozone, are mostly confined to technical and academic debate with scant appearance in governments' concerns.

This paper contends that concentrating on financial issues is a one-sided approach that on its own cannot explain, let alone solve, Europe's troubles. Although it is true that the current financial distress of various EU member countries is an impediment to their growth, this is so only in view of the present incomplete institutional and governance architecture of the Union, and particularly the Eurozone. However, if one takes a broader, longer and deeper perspective, it appears that the present financial and monetary crisis of the Union is rooted in the real economy and the institutional architecture. In its turn, the incompleteness of the latter reflects the fundamental lack of trust among member countries, which they seek to overcome by means of financial discipline.

Moreover, concentrating on fiscal and monetary solutions to the crisis by means of restrictive policies is likely to be untenable in the medium-long run because of its depressive effects on the real economy, heavy social costs and political destabilisation, and long-term damage to the production system. Stabilisation policies magnify the impacts of neo-liberal policies implemented since the 1970s into increasing inequalities, decreasing mobility and opportunities. They polarize income and wealth distribution, thus destructuring the middle class and spreading poverty. These processes have negative consequences for domestic markets and prospects of economic growth.

Although some of the problems are common to the entire European Union, it is within the Eurozone that they are manifest in their full significance. Indeed, the common currency removes monetary policy from the competence of national governments, and the Stability Pact strongly limits their fiscal policies. …

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