Origins and prospects of the Euro existential crisis

Luigi Bonatti () and Andrea Fracasso

No 2013/03, DEM Discussion Papers from Department of Economics and Management

Abstract: 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.

Keywords: European imbalances; Macroeconomic divergence and adjustment; Germany; Political economy of structural change; Social market economy (search for similar items in EconPapers)
JEL-codes: F41 F42 F43 F51 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-eec
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