Reconsidering the economic and political reasons of the euro area crisis: Diverging fundamentals or self-fulfilling expectations?
DOI:
https://doi.org/10.13133/2037-3643_70.282_3Keywords:
Euro crisis, Fundamentals, Self-fulfilling expectations, Fiscal solidarity, Monetary solidarityAbstract
This article nests the explanations of the euro crisis in terms of economic, political and institutional causes within the diverging fundamentals vs. self-fulfilling expectations debate. It argues that explanations based on fundamental divergences refer to a subset of economic variables only, while those based on self-fulfilling expectations refer to political and institutional variables. However, since there is no reason not to include the latter among the fundamental variables of an economy, there is no need to refer to negative self-fulfilling expectations as an explanation for the crisis. In the paper, the role played by political and institutional variables, namely federal and monetary solidarity, is formalized in a simple model of diverging fundamentals that goes beyond the consideration of economic variables only.
JEL Classification: E58, E65, F36, F45, G01
References
References
Ahearne, A., B. Schmitz, and J. von Hagen (2007), ‘Current Account Imbalances in the Euro Area (draft Version).’ CASE Network Studies and Analyses 0345. CASE-Center for Social and Economic Research. Available at: https://ideas.repec.org/p/sec/cnstan/0345.html.
Alessandrini, P., M. Fratianni, A. Hughes Hallet, and A. Presbitero (2012), ‘Exteral Imbalances and Financial Fragility in the Eurozone’, MoFiR working paper, n. 66.
Attinasi, M. G., Checherita, C., and Nickel, C., (2009), ‘What Explains the Suge in euro Aea Sovereign Spreads During the Financial Crisis of 2007-09?’, ECB Woking Paper n. 1131.
Baer, G. and T. Padoa-Schioppa (1989), ‘The Werner Report Revisited’, in Collection of Papers Annexed to the report on Economic and Monetary Union (Delors Report, 1989), pp. 53-60
Baldwin, R. and C. Wyplosz (2015), The Economics of European Integration, 5th edn, (London: McGrawHill).
Begg D., Wyplosz C. (1993), ‘The European Monetary System: Recent intellectual History’, in CEPR, The Monetary Future of Europe, Conference organized by CEPR and Banco Pastor, La Coruna, 11/12 December 1992.
Bini Smaghi, L. (2001), L’euro. (Bologna: Il Mulino).
Blanchard, O., and F. Giavazzi (2002), ‘Current Account Deficits in the Euro Area: The End of the Feldstein-Horioka Puzzle?’ Brookings Papers on Economic Activity, Vol. 2, pp.147-186
Blanchard, O. and D. Leigh (2013), ‘Growth Forecast Errors and Fiscal Multipliers.’ IMF Working Paper 13/1. International Monetary Fund.
Bonatti, L. and A. Fracasso (2013), ‘The German Model and the European Crisis’, Journal of Common Market Studies, Vol. 51, No. 6, November, pp. 1023–1039, DOI: 10.1111/jcms.12067
Boyer, R. (2000), ‘The Unanticipated Fallout of European Monetary Union: The Political and Institutional Deficits of the Euro‘ in After the Euro: Shaping Institutions for Governance in the Wake of European Monetary Union, Colin Crouch (ed), Oxford University Press, 2000
Campos, N. F. and F. Coricelli (2012), ‘Financial liberalization and reversals: political and economic determinants’, Economic Policy, pp. 485-513, July
Cesaratto, S. (2012), ‘The European crisis: political and institutional failures or method in the madness?’, Insight: Free thinking for global social progress, available at: http://www.insightweb.it/web/content/european-crisis-political-and-institutional-failures-or-method-madness.
Collignon, S. (2012), ‘Macroeconomic imbalances and competitiveness in the euro area’, in Transfer: European Review of Labour and Research, vol. 19, N. 1, pp. 63-87, February, doi: 10.1177/1024258912469467
Cooper, R. (2012), ‘Fragile Debt and the Credible Sharing of Strategic Uncertainty’, NBER Working Paper n. 18377.
Copelovitch, M., J. Frieden, and S. Walter (2016), “The Political Economy of the Euro Crisis”, Comparative Political Studies, Vol. 49, No. 7, pp. 811–840.
Crouch, C. (2000) ‘Introduction: The Political and Institutional Deficits of European Monetary Union‘, in After the Euro: Shaping Institutions for Governance in the Wake of European Monetary Union, Colin Crouch (ed.) (Oxford: Oxford University Press).
De Grauwe, P. (2012), ‘The Governance of a Fragile Eurozone.’ Australian Economic Review, 45 (3), pp. 255–68.
De Grauwe, P. and Y. Ji (2012), Mispricing of sovereign risk and macroeconomic stability in the Eurozone, Journal of Common Market Studies, Vol. 50, No. 6, November, pp. 866–80
De Grauwe, P. and Y. Ji (2013a), ‘From panic-driven austerity to symmetric macroeconomic policies in the Eurozone’, Journal of Common Market Studies, Vol.51, Annual Review, p. 31-41.
De Grauwe, P. and Y. Ji (2013b), ‘Self-fulfilling crises in the Eurozone: An empirical test’, Journal of International Money and Finance - The European Sovereign Debt Crisis: Background & Perspective, Vol. 34, April, pp. 15–36.
Della Posta, P. (2016a), ‘Self-Fulfilling and Fundamentals Based Speculative Attacks: A Theoretical Interpretation of the Euro Area Crisis’, Global Economy Journal, Vol. 16, No. 3, pp. 459-478.
Della Posta, P. (2016b), ‘Currency and External Debt Crises: a Unifying Framework’, Journal of Policy Modeling, Vol. 38, No. 4, July-August, pp. 723–36.
Dornbusch, R. (2001), “A Primer on Emerging Market Crises”, Nber Working Paper, No. 8326
Dyson, K. H. F., and K. Featherstone (1999), The Road to Maastricht: Negotiating Economic and Monetary Union. (Oxford: Oxford University Press).
Eichengreen B., Wyplosz, C. (1993), ‘The Unstable EMS’, Brookings Papers on Economic Activity, 0(1), pp. 51-124.
Eichengreen, B. (1993), ‘Three perspectives on Bretton Woods System’, in Bordo, M.D., Eichengreen, B. (Eds.), A Retrospective on the Bretton Woods System: Lessons for International Monetary Refom, pp. 621-658. (Chicago: University of Chicago Press).
Favero C. and A. Missale (2012), ‘Sovereign Spreads in the Eurozone: which prospects for a Eurobond’?, Economic Policy, Vol. 107, pp. 231-273.
Feldstein, M. (1992), ‘Europe’s monetary union: the case against EMU’, The Economist, June 13.
Feldstein, M. (1997), ‘The Political Economy of the European Economic and Monetary Union: Political Sources of an Economic Liability’, The Journal of Economic Perspectives, Vol. 11, n. 4, pp. 23-42.
Fleming, J.M. (1971), ‘On Exchange Rate Unification’, Economic Journal, vol. 81, pp. 467-488.
Giavazzi, F. and L. Spaventa (2010), ‘Why the Current Account Matters in a Monetary Union’, Cepr Discussion Paper n. 8008.
Giordano, F. and Persaud, S. (1998), The Political Economy of Monetary Union: Towards the euro. (London: Routledge).
Giordano, L., N. Linciano e P. Soccorso (2012), ‘The determinants of government yield spreads in the euro area’, Consob Quaderni di Finanza n. 71 (Ottobre).
Goldstein, I. (2012), ‘Empirical Literature on Financial Crises: Fundamentals vs. Panic’, ch. 36 in The Evidence and Impact of Financial Globalization, Gerard Caprio (ed), Academic Press.
Ghosh, A.R., J.I. Kim, E.G. Mendoza, J.D. Ostry and M.S. Qureshi (2013), ‘Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies’, Economic Journal, Vol. 123, pp. F4-F30.
Gros, D. (2013), ‘Foreign debt versus domestic debt in the euro area’, Oxford Review of Economic Policy, Volume 29, Issue 3, pp. 502-517, DOI: 10.1093/oxrep/grt038.
Gros, D. and Thygesen, N. (1998), European Monetary Integration (2nd ed) Harlow: Pearson Education Limited, 1998.
Jeanne, O. (2000), “Currency Crises: a Perspective on Recent Theoretical Developments”, Special Papers in International Economics, XX, International Finance Section, Princeton University
Jones, E. (2002), The Politics of Economic and Monetary Union: Integration and Idiosyncrasy. (Lanham: Rowman and Littlefield Publisher, Inc).
Katsimi, M. and T. Moutos (2010), ‘EMU and the Greek crisis: the political-economy perspective’, European Journal of Political Economy, Vol. 26, pp. 568-576.
Keefer, P. (2002), ‘Politics and the Determinants of Banking Crises: The Effects of Political Checks and Balances’, in Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.) Banking, Financial Integration, and International Crises, chapter 3, pages 085-112.
Krugman, P. (1979), “A Model of Balance-of-Payments Crises”, Journal of Money, Credit and
Banking, Vol. 11, No. 3, pp. 311-325.
Krugman P. (2011), ‘Can Europe be saved?’, available at: http://www.nytimes.com/2011/01/16/magazine/16Europe-t.html
Kruse, D. C., Monetary Integration in Western Europe: EMU, EMS and Beyond, London: Butterworth, 1980.
Lane, P. R. (2012), ‘The European Sovereign Debt Crisis’, Journal of Economic Perspectives, Volume 26, Number 3, Pages 49-68, Summer 2012.
Ludlow, P., The Making of the European Monetary System: a case Study of the Politics of the European Community. London: Butterworth Scientific, 1982.
Maes, I., Economic Thought and the Making of European Monetary Union. Cheltenham, UK: Edward Elgar, 2002
Moro, B. and V. Becker (2016), Modern Financial Crises: Argentina, United States and Europe, Heidelberg: Springer Verlag.
Moro, B. (2014), ‘‘Lessons from the European economic and financial great crisis: A survey’, European Journal of Political Economy, Volume 34, Supplement, European Debt Crisis, June, pp. S9–S24.
Morris, S. and H. S. Shin (1998), ‘Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks’, American Economic Review, Vol. 88, No. 3, pp. 587-597.
O’Keeffe, M. and A. Terzi (2015), The Political Economy of Financial Crisis Policy, Bruegel Working Paper, 2015/06, July.
Orphanides, A. (2014), “The Euro Area Crisis: Politics over Economics”, Atlantic Economic Journal, Vol. 42, No. 3, pp. 243-263, doi:10.1007/s11293-014-9419-1
Panico C. (2010), ‘Causes of the Debt Crisis in Europe and the Role of Regional Integration’, available at: http://www.networkideas.org/featart/oct2010/Carlo_Panico.pdf.
Robinson, J. and M. Bensasson (2015), ‘Greece Could Default Without Exiting Euro, Say Economists’, available at: http://www.bloomberg.com/news/articles/2015-04-23/greek-default-without-euro-exit-conceivable-for-most-economists, 24 April.
Rother, B. (2009), The Determinants of Currency Crises. A Political-Economy Approach. (London: Palgrave Macmillan).
Roubini, N. and J. Sachs (1989), ‘Political and economic determinants of budget deficits in the industrial democracies’, European Economic Review, vol. 33, pp. 903-938. North-Holland.
Scheller, H. K. (2006), The European Central Bank: History, Role and Functions, (2nd ed). Frankfurt: Ecb-Eurosystem, available at the internet address http://www.ecb.int.
Senior Nello, S. (2012), The European Union: Economics, Policy and History, 3rd edn. (New York: Mc Graw Hill).
Sinn, H.W. (2011), The Trouble with Eurobonds, 2011-08-25, available at the web address: http://www.project-syndicate.org/commentary/sinn39/English.
Spolaore, E. (2013). What is European integration really about? A political guide for economists. Journal of Economic Perspectives, Vol. 27, No. 3, pp. 125–144.
Tamborini, R. (2015), ‘Heterogeneous Market Beliefs, Fundamentals and the Sovereign Debt Crisis in the Eurozone’, Economica, Volume 82, Issue s1, December 2015, pp. 1153–1176, DOI: 10.1111/ecca.12155.
Tavlas, G. S. (1993). 'The ‘New’ Theory of Optimum Currency Areas', World Economy Vol. 16, No. 6, pp. 663–85.
Verdun, A. (2002), European Responses to Globalization and Financial Market Integration: Perceptions of Economic and Monetary Union in Britain, France and Germany. (London: Palgrave Macmillan).
Walters, S. (2013), Financial Crises and the Politics of Macroeconomic Adjustments. (Cambridge: Cambridge University Press), December.
Wyplosz, C. (2006), ‘European Monetary Union: the dark sides of a major success’, Economic Policy, Vol. 21, No. 46, April, pp. 207-61.
Downloads
Published
How to Cite
Issue
Section
License
