Modeling the Debt Mechanics of the Euro Zone

Karl Farmer and Matthias Schelnast
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Matthias Schelnast: University of Graz

Chapter 20 in Growth and International Trade, 2021, pp 479-503 from Springer

Abstract: Abstract In spite of the insightful diagnose of the late Milton Friedman that the single currency of the European Economic and Monetary Union (EMU) would not survive the first major economic crisis, the Euro exists since more than two decades. This is all the more surprising as after Euro inception severe external imbalances between Northern and Southern Euro zone countries popped up which brought prominent US economists (Stiglitz 2012; Rodrik 2012) to forecast the collapse of the EMU. In order to understand why these economists feared EMU’s break-up it seems to be expedient to explore the extent to which the external debt accumulation of Southern EMU countries can be attributed to Euro-related capital market integration. We suggest that basically differences in economic fundamentals, associated with the political and cultural heterogeneity of Northern and Southern Euro zone countries, were transformed into the observed external imbalances when interest rates converged.

Keywords: Interest rate; Total factor productivity; Real exchange rate; Real interest rate; Financial integration (search for similar items in EconPapers)
Date: 2021
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Chapter: Modeling the Debt Mechanics of the Euro Zone (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sptchp:978-3-662-62943-7_20

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DOI: 10.1007/978-3-662-62943-7_20

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