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But it will not be enough. Unless the ECB is given new instruments as part of a Europe-wide growth and rebalancing package, our continent is facing impending implosion. Concerning Policy 3 in The Modest Proposal. It might well be able to. Also, if the ECB part-finances the projects with issues of bonds that are then serviced by the member-states, then there is an element of political ownership of these projects by member-states, as opposed to just a banking transaction on the part of the EIB. I am currently finishing my masters degree in Economics from the University of Denver, and I must admit that I am a huge fan of your site and information provided about Greece and the Eurozone write large.

However, I do have a question concerning the nature of currency unions. While we have a fiscal transfer union here—for example California gets 0. Now ultimately, the federal government is, politically speaking, capable of ameliorating the situation yet it refrains from directly propping up states in deficit. Moreover, is fiscal federalism really the be all end all solution in Europe anyways?

If you know of any articles or you have any comments concerning the fundamental differences of currency zones USA vs the EU I would be much obliged for any help in the matter. It is the military-industrial complex. Have you noticed that every large procurement contract signed by an arm of the US government comes with strings attached regarding the coordinates of new plants and manufacturing facilities?

This is a clear case of directing investment to deficit regions within the US. Additionally, whenever a deal is cut in Congress e. It is, I confess, a haphazard and curious SRM. But it, nevertheless, a functioning SRM which keeps the Union together. Thanks again for your post. Perhaps I am reaching, but it seems that an SRM within a currency union does not accord with a market mechanism per se. Rather, it appears as a coordinated or planned political process.

Nevertheless, I am not surprised and this further confirms suspicions I have had in regard to our old friend the invisible hand. While Geece is at least for now anyways a member of the EU, some commentators suggest that austerity can work. Estonia or Latvia are often suggested as a model, but I have some doubts about this comparison. I personally view as somewhat simplistic and was curious to hear your thoughts on such matters. I think your proposals are interesting and i am especially fascinated by the tranches idea. It seems to be so simple but effective. But i guess this are just emotions.

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Sadly emotions might be one of the most important factors for the current situations and they are hard to measure for all our predictions. Just a crazy question…. Varoufakis, why do we have to save big, bankrupt banks?

Prelude to the crisis

After all, only the shareholders took the profits and they are the ones who should take the losses as well. That is the involvement of Goldman Sachs in the Greek dept masking during the years I made quite an intensive research on the matter even though I was not able to find something specific and accademically acceptable to work on. I would really appreciate it if you could give me some advice on where and what to search for!

the eurozone crisis overview and issues for congress Manual

Thank you in advance for your precious help, Gianfranco. This is my first visit to your blog! We are a collection of volunteers and starting a new project in a community in the same niche. Your blog provided us beneficial information to work on. You have done a wonderful job! Dear Professor, First of all let me congratulate you on your Global Minotaur book, which I found very interesting and inspiring. I read your book first in English edition published by Zed Books and then in the Italian translation published by Asterios in June I regret to inform you that the latter is the worst translation I ever encountered in my life.

For example, political necessity held that the six EU founding members would also be original Eurozone members, despite their inability to meet agreed-upon economic criteria.

Institutional Framework After The Lisbon Treaty

When the euro was implemented in , Eurozone nations were less integrated than prescribed by the Werner and Delors reports, and, moreover, EU leaders further weakened the financial and macroeconomic rules of the Stability and Growth Pact. The latter provides a framework for coordinating national fiscal policies in the EU, and serves to safeguard sound public finances, based on shared EU interest.

Thus, while the political goal of implementing a common currency was achieved, there was no central fiscal agent, no effective budget discipline enforcement, and no clearly defined path toward further economic convergence. From its beginnings, the flaws in the design of the common currency were pointed out by a number of economists, but its inherent problems were not fully exposed until soon after the beginning of the global economic crisis set in motion by the recession.

For example, Papadimitriou, Wray, and Nersisyan , and Veron document structural design issues of the common currency. Since then, it has become increasingly clear that the problems plaguing the Eurozone are not only structural and multifaceted, but somewhat country-specific as a result of the remaining disparity within the region. Yet they are highly interconnected due to the policies built around the common currency. Kirkegaard and others have identified distinct, but overlapping and mutually reinforcing crises.

Euro Crisis explained (explainity® explainer video)

One relates to the design of euro area institutions, discussed earlier. Second, excessive debt levels among some Eurozone nations made it impossible to service their sovereign nation-specific debt without further increasing their financial obligations to their bond holders. The combined problems of euro-denominated sovereign debt and the inability of the ECB to guarantee the sovereign debt led to concerns that regional financial instability would be transferred to other nations, closely linked asset markets, and financial institutions within and outside of the Eurozone.

Third, the Eurozone faced a banking crisis initiated by real estate booms in Ireland and Spain. Moreover, the banks were already highly leveraged, and much of the bank debt was issued by their home governments. As in previous cases of over-leveraged financial institutions, policy makers were faced with a difficult choice of either rescuing the banks and thereby jeopardizing sovereign solvency, or refusing rescue and risking severe economic downturns.

That is, Eurozone countries faced country-specific shocks, including fiscal and current account imbalances in Greece, a surge in credit and banking crises in Ireland and Spain, and productivity growth in Portugal and Italy. Over a decade prior to , current account balances of both the EU, as a whole, and the Eurozone, in particular, obscured rising deficits of Greece, Ireland, Italy, Portugal, and Spain, offset by increased German surpluses. While core nations—such as Austria, Finland and Germany—improved their asset positions, countries in the periphery—Greece, Ireland, Italy, Portugal, and Spain—accumulated large net foreign liabilities.

Sinn and Valentinyi note that the current account imbalances within the Eurozone were made worse by the common currency because it eliminated exchange risks, provided incentives for investors to ignore country-specific investment risks, and created unrealistic expectations about economic convergence between core and periphery nations.


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In their efforts to improve their competitive position without exiting the euro, periphery nations were unable to devalue their currency for the purposes of improving their current account imbalances and enhancing their competitiveness. Instead, they were forced to bring about devaluation by decreasing prices and costs including wages using deflationary macroeconomic policies.

As described by De Grauwe , such policies not only lead to long and painful periods of recession and budget deficits, but are also prone to extended periods with high unemployment, protracted deflationary spirals, possible additional sovereign debt and banking crises, and social unrest.

On the other side, cost and price competitive core nations such as Germany that had experienced high productivity growth over the decade prior to the crisis were unable to appreciate their currency to help restore internal trade competitiveness and balance within the Eurozone. Perhaps more important than economic features are the political aspects of the Eurozone crisis. European nations and people neither agree on the causes of the crisis nor on the path forward.

The prevailing view in core nations predominantly in northern parts of the Eurozone links the crisis to a lack of enforcement of rules, whereas the predominant view in the periphery is that the crisis is the result of systematic flaws. Thus, the crisis of the common European currency appears to reflect a search for a common European purpose. Findings by the IMF and fairly similar ones by Maplecroft indicate that if contained, a continued Eurozone crisis will likely have limited effects on areas outside of Europe.

However, without economic growth, the crisis will not only linger in the Eurozone itself but also dampen economic growth in other areas of Europe and nations across the globe tied to Europe through trade and investment links. Nelson et al.

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It’s All Connected: An Overview of the Euro Crisis

The authors suggest that a possible euro depreciation relative to the dollar might increase the U. Treasury yields, and increase U. Policymakers have mainly focused their responses to the Eurozone crisis on efforts to develop solutions for sovereign nation-specific debt and banking crises, and, more recently, to strengthen the institutional setting of the EU and Eurozone. Increased funding for and the consolidation of temporary institutions into the permanent European Stability Mechanism in have improved the financial stability of the most indebted Eurozone nations.

Also, as a step toward the creation of a banking union, the ECB has a new supervisory role over Eurozone banks. For example, De Grauwe a; and b suggested earlier that market confidence would be improved by the ECB commitment to buy sovereign bonds. Similar calls were made by Wolf By announcing itself as a lender of last resort, bond yield spreads the interest rates on a government bond compared to that of very solid status benchmark bonds, such as German bonds among Eurozone nations that had emerged since the start of the Eurozone crisis dramatically reduced.

One of the most intractable problems—the large, internal imbalances within the Eurozone—has thus far not been dealt with in an adequate manner. As mentioned, efforts to regain competitiveness have focused on devaluing through lowering prices, wages, and production costs in periphery nations and less on conducting the reverse in core nations. Sinn and Valentinyi noted that these policies have had only minimal effects on bridging the competitiveness gap between periphery and core nations.


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Furthermore, there appears to be an increasingly widespread realization that the controversial austerity policies consisting of spending cuts and tax increases may have worsened and prolonged the Eurozone crisis by dampening economic growth and causing historically high unemployment levels in many Eurozone nations, and thereby further increased debt burdens among households, firms, and governments.

Various economists have proposed alternative solutions to the austerity policies and have suggested ways to help enable nations in the periphery to regain competitiveness.