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


The paper looks at the deep and the direct causes of the crisis in the Eurozone and considers what changes are necessary. It shows that, together with financial aspects, the Eurozone crisis stems from the difficulties of the real economy and the incompleteness of European institutions. The former include divergent real performances, unsustainable development paths of the Member States, and growing distributive disparities. The consequences of misconceived stabilisation policies magnified the effect of the above factors. The international crisis caused a shock that has had asymmetric effects within the Eurozone due to the divergent economic performances and the different institutions of the member countries. At the same time, European institutional incompleteness deprived member countries of effective policy-making and European policy management and support, thus converting the common currency into a problematic asset. Building on this framework, the paper critically analyses the institutional and economic reforms necessary to vitalise the process of European integration, and it stresses the urgent need to tackle the real and microeconomic causes of the crisis.

JEL: E02, E63, G01, 052, E65

Keywords: European institutions, Eurozone, Financial crisis, Real economy, Vulnerability

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. …

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